What a Real Estate Investment Trust Is and How It Works

A Real Estate Investment Trust, or REIT, is a company that owns and operates income-producing real estate — apartment buildings, office parks, shopping centers, warehouses, hotels, or medical facilities. When you buy shares in a REIT, you own a piece of that company and receive a portion of the income it generates from rents and property sales.

REITs exist because federal law allows them to avoid corporate income tax if they distribute at least 90 percent of their taxable income to shareholders each year. That requirement is why REIT dividends tend to be higher than dividends from other stocks. You pay income tax on those dividends, but the REIT itself does not.

The main appeal is straightforward: you get real estate exposure without buying property, managing tenants, handling maintenance, or putting down a large down payment. A REIT does all that work. You simply hold the shares and collect dividends.

Key Takeaways

  • REITs trade on stock exchanges like regular stocks, so you buy them through a brokerage account using the same process as buying any other stock.
  • You must pay income tax on REIT dividends at ordinary income tax rates, which are usually higher than the capital gains rates applied to stock dividends.
  • REITs come in three types — equity REITs (own property), mortgage REITs (lend money on property), and hybrid REITs — and each carries different risk and return profiles.
  • A REIT must own real estate, distribute 90 percent of taxable income to shareholders, and meet specific size and structure requirements set by the IRS.
  • You can buy individual REIT shares, REIT mutual funds, or REIT exchange-traded funds (ETFs), each with different costs and diversification levels.

Three Types of REITs and What They Own

Equity REITs own the actual buildings. They collect rent from tenants, handle repairs and maintenance, and sell properties when the time is right. Most REITs are equity REITs. Examples include apartment REITs, retail REITs, industrial warehouse REITs, and healthcare facility REITs. Your return comes from rental income (paid out as dividends) and appreciation if the properties gain value.

Mortgage REITs do not own property. Instead, they lend money to real estate owners and collect interest on those loans. Some mortgage REITs buy mortgages that already exist; others originate new ones. Your return is the interest income they collect. Mortgage REITs are riskier because they depend on borrowers paying on time, and their value swings more sharply when interest rates change.

Hybrid REITs do both — they own some properties and hold some mortgages. They are less common and sit between equity and mortgage REITs in terms of risk and return.

Within equity REITs, you will also see specialization by property type: residential (apartments, single-family homes), commercial (office, retail), industrial (warehouses, data centers), healthcare (medical offices, senior housing), or hospitality (hotels, resorts). Each sector performs differently depending on the economy, interest rates, and tenant demand.

How to Buy REIT Shares Through a Brokerage Account

You buy REITs the same way you buy any stock: through a brokerage account. Open an account with a broker — Fidelity, Vanguard, Charles Schwab, E-Trade, and others all offer this service. You will need to provide your Social Security number, proof of address, and banking information to fund the account.

Once your account is open and funded, search for the REIT by its ticker symbol (a four- or five-letter code). For example, "SPG" is Simon Property Group, a major retail REIT. Enter the number of shares you want to buy and place the order. The trade settles in two business days, and the shares appear in your account.

Most brokers charge no commission to buy or sell stocks or REITs, though some charge a small fee for certain transactions. Check your broker's fee schedule before you open an account. You can buy as few as one share, so there is no minimum investment beyond the share price itself.

Dividends are usually paid quarterly. The REIT deposits them directly into your brokerage account, where you can reinvest them to buy more shares, withdraw the cash, or leave them sitting.

REIT Mutual Funds and ETFs as an Alternative to Individual Shares

If you do not want to pick individual REITs, you can buy a REIT mutual fund or REIT exchange-traded fund (ETF). Both hold a basket of many REITs, so you get instant diversification across property types and geographic regions.

A REIT mutual fund is managed by a fund company. You buy shares in the fund, and a manager decides which REITs to hold. Actively managed funds charge higher fees (often 0.5 to 1.5 percent per year) because someone is making those decisions. Index funds track a REIT index and charge lower fees (often 0.1 to 0.4 percent per year) because they simply hold whatever REITs are in the index.

A REIT ETF works similarly to an index mutual fund — it holds many REITs and tracks an index — but it trades on an exchange like a stock. You buy and sell ETF shares through your brokerage account at any time during market hours. Fees are typically low, usually 0.1 to 0.5 percent per year. Popular REIT ETFs include VNQ (Vanguard Real Estate ETF) and SCHH (Schwab U.S. REIT ETF).

The trade-off is simple: individual REITs let you pick specific properties or sectors you believe in, but require research and carry more risk if one REIT performs poorly. Funds and ETFs spread that risk across many REITs but charge ongoing fees and give you less control over what you own.

Tax Treatment of REIT Dividends and Capital Gains

REIT dividends are taxed as ordinary income, not as may have access to dividends. That means they are taxed at your regular income tax rate — up to 37 percent at the federal level — rather than the lower capital gains rates (0, 15, or 20 percent) that apply to dividends from most stocks. This is a significant difference if you hold REITs in a taxable account.

If you sell REIT shares for more than you paid, you owe capital gains tax on the profit. If you held the shares for more than one year, that gain is taxed at the lower long-term capital gains rate. If you held them for one year or less, it is taxed as ordinary income.

Because of the tax treatment of dividends, many investors hold REITs in tax-advantaged accounts like IRAs or 401(k)s, where dividends and gains are not taxed until you withdraw the money. If you hold REITs in a regular taxable brokerage account, expect to owe taxes on the dividends each year, even if you reinvest them.

Risks and Factors That Affect REIT Performance

REITs are not risk-free. Interest rate changes affect REIT values directly. When the Federal Reserve raises interest rates, borrowing becomes more expensive, property values fall, and REIT share prices often decline. When rates fall, the opposite usually happens. This sensitivity to rates makes REITs riskier than bonds but less risky than growth stocks.

Economic recessions hurt REITs because tenants stop paying rent or go out of business. Retail REITs were hit hard during the pandemic when stores closed. Office REITs have struggled as companies embrace remote work. Residential and industrial REITs have held up better because people still need housing and warehouses still receive packages.

Individual property performance matters too. A REIT that owns properties in a declining city will underperform one that owns properties in a growing city. Leverage — the amount of debt a REIT carries — also affects risk. A REIT with high debt is riskier because it must service that debt even if rental income falls.

Liquidity is generally not a problem for large, publicly traded REITs because their shares trade constantly. Smaller or non-traded REITs can be harder to sell quickly.

Getting Started: Steps to Research and Buy Your First REIT

Start by deciding whether you want to pick individual REITs or buy a fund or ETF. If you choose individual REITs, read the company's annual report (Form 10-K) and quarterly reports (Form 10-Q), both available on the SEC's website. Look at the properties they own, their occupancy rates, their debt levels, and their dividend history.

Compare REITs in the same sector. A retail REIT's performance depends on foot traffic and tenant demand, so compare occupancy rates and rent growth across similar companies. An apartment REIT's performance depends on housing demand and rent trends, so look at those metrics instead.

Check the dividend yield — the annual dividend divided by the share price. A yield that is much higher than competitors might signal trouble, or it might mean the market has temporarily undervalued the REIT. A yield that is much lower might mean the market expects strong growth.

Once you have chosen a REIT or fund, open a brokerage account if you do not have one, fund it, and place your order. Start small if you are new to REITs. You can always buy more shares later as you become more comfortable.

Frequently Asked Questions

Do I need a lot of money to start investing in REITs?

No. You can buy a single share of most REITs for anywhere from $20 to $200, depending on the REIT. REIT ETFs and mutual funds work the same way — you can buy one share or one fund unit. Your only real constraint is the minimum deposit your brokerage requires to open an account, which is often $0 to $500.

Can I lose money investing in REITs?

Yes. REIT share prices go up and down based on interest rates, economic conditions, and property performance. If you sell when the price is lower than what you paid, you lose money. Dividends can also be cut if a REIT's income falls. However, if you hold long-term and reinvest dividends, historical returns have been solid.

What is the difference between a REIT and a real estate mutual fund?

A REIT is a company that owns real estate and distributes income to shareholders. A real estate mutual fund is a fund that holds shares in multiple REITs or real estate companies. A REIT mutual fund gives you diversification across many REITs without picking individual ones yourself.

Should I hold REITs in a regular brokerage account or a retirement account?

Retirement accounts (IRAs, 401(k)s) are usually better because REIT dividends are taxed as ordinary income, which is expensive in a taxable account. In a retirement account, you avoid that tax until you withdraw. If you have already maxed out your retirement contributions, a taxable account is fine, but be prepared for annual tax bills.

How often do REITs pay dividends?

Most REITs pay dividends quarterly, though some pay monthly or annually. The payment schedule is listed on the REIT's website and in your brokerage account. You can reinvest dividends automatically or take them as cash.