What a REIT is and how it works
A Real Estate Investment Trust (REIT) is a company that owns or finances 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 rent and property sales.
REITs must distribute at least 90 percent of their taxable income to shareholders as dividends. That means most of your return comes as regular cash payments, not from the share price going up. The trade-off is that REITs are required to pay out so much that they rarely reinvest profits back into growth the way other companies do.
There are three main types. Equity REITs own the properties themselves. Mortgage REITs lend money to real estate developers and collect interest. Hybrid REITs do both. Most individual investors buy equity REITs because the income is more predictable and the business model is easier to understand.
Key Takeaways
- You can buy REIT shares through any brokerage account the same way you buy stock, with no minimum investment beyond the share price.
- REITs must pay out 90 percent of taxable income as dividends, so your return is mostly cash payments rather than stock price growth.
- Dividend income from REITs is taxed as ordinary income, not at the lower capital gains rate, which affects your after-tax return.
- You can own individual REIT shares, buy a REIT mutual fund or exchange-traded fund, or invest through a real estate crowdfunding platform.
- REITs are sensitive to interest rates — when the Federal Reserve raises rates, REIT prices typically fall because borrowing becomes more expensive.
Where to buy REIT shares
The easiest route is to open a brokerage account with any major firm — Fidelity, Vanguard, Charles Schwab, E*TRADE, or dozens of others — and buy REIT shares directly, the same way you would buy any stock. You need a Social Security number, proof of address, and enough money to cover the share price (usually $20 to $100 per share, depending on the REIT). There is no separate REIT account type; it all happens in a regular taxable brokerage account or an IRA.
If you want to own multiple REITs without picking individual ones, buy a REIT mutual fund or REIT exchange-traded fund (ETF). These hold dozens or hundreds of REIT shares and charge an annual fee (typically 0.1 to 1 percent of what you invest). Vanguard Real Estate ETF (VNQ) and Schwab U.S. REIT ETF (SCHH) are among the largest and cheapest. A mutual fund works the same way but trades once per day instead of continuously during market hours.
A third option is real estate crowdfunding platforms like Fundrise or RealtyMogul, which let you invest in specific properties or property portfolios with smaller amounts of money (sometimes as little as $500). These are not traditional REITs and are not traded on stock exchanges, so your money is less liquid — you may not be able to sell quickly if you need cash.
How dividends work and what you owe in taxes
When a REIT pays a dividend, the company sends you cash (or deposits it into your brokerage account) on a schedule set by the board — usually quarterly, sometimes monthly. The amount per share varies depending on how much income the REIT generated that quarter. A REIT that owns apartment buildings in a strong rental market might pay a higher dividend than one that owns struggling office space.
The tax treatment is the key difference from other investments. Dividend income from REITs is taxed as ordinary income at your regular tax rate (up to 37 percent federally, plus state tax), not at the lower capital gains rate (15 or 20 percent) that applies to stock dividends. This means a REIT dividend of $1,000 could cost you $370 in federal tax if you are in the top bracket, whereas a stock dividend of the same size might cost only $200. That difference matters over time, especially in a taxable account.
If you hold REITs in a tax-advantaged account like a traditional IRA or Roth IRA, you do not pay tax on the dividends when you receive them. That is one reason many investors keep REITs in retirement accounts and hold stocks in taxable accounts — it reduces the tax drag.
Understanding REIT performance and risk
REIT prices move based on two things: the income they generate (which affects dividend payments) and interest rates. When the Federal Reserve raises interest rates, REITs typically fall in price because property owners have to pay more to borrow money for development and renovation. Higher borrowing costs reduce future profits, so investors demand a lower price to compensate. The reverse happens when rates fall — REIT prices often rise.
Different types of properties perform differently depending on economic conditions. During a recession, apartment REITs often hold up better than office or retail REITs because people still need housing. During strong growth, industrial and logistics REITs (which own warehouses and distribution centers) tend to outperform because shipping and e-commerce demand rises.
REITs are also sensitive to location and management quality. A REIT that owns well-maintained apartments in growing cities will generate more stable income than one that owns aging properties in declining areas. Before buying an individual REIT, read the annual report (10-K filing) to see what properties it owns, how much debt it carries, and what percentage of tenants are paying rent on time.
Comparing individual REITs to REIT funds
| Approach | Minimum Investment | Diversification | Time Required | Tax Efficiency |
|---|---|---|---|---|
| Individual REIT shares | Share price ($20–$100) | You own one company's properties | Research and monitoring | You control when to sell and realize gains |
| REIT ETF or mutual fund | Share price ($30–$80) | Owns 50–500+ REITs across property types | Minimal — fund manager handles it | Lower turnover usually means fewer taxable events |
| Real estate crowdfunding | $500–$5,000 | Depends on platform; often one property or deal | Minimal upfront; illiquid long-term | Varies; often taxed as ordinary income |
Individual REITs make sense if you have strong conviction about a specific property type or market and want to research management and holdings closely. REIT funds make sense if you want broad exposure without the work. Crowdfunding makes sense if you have a specific property you believe in and can afford to lock up money for several years.
What to look for in a REIT before you invest
Start with the dividend yield — the annual dividend divided by the share price. A REIT yielding 3 percent pays $3 per year for every $100 you invest. Compare it to the average yield of other REITs in the same sector (apartment, office, retail, industrial) to see if it is competitive. A yield much higher than peers might mean the market thinks the dividend is at risk; a yield much lower might mean the market expects growth.
Check the payout ratio — the percentage of income the REIT pays out as dividends. Most REITs are required to pay out 90 percent, but some pay out more than 100 percent by drawing down reserves or selling properties. A payout ratio above 100 percent is a red flag that the dividend may not be sustainable.
Look at debt levels. REITs use leverage (borrowed money) to buy more properties, which can boost returns when times are good but creates risk when rents fall or interest rates spike. Compare the REIT's debt-to-assets ratio to others in its sector. A ratio above 60 percent is worth scrutinizing.
Read the funds from operations (FFO) in the quarterly earnings report. FFO is a measure of cash flow that real estate investors use instead of traditional earnings per share. If FFO is growing, the REIT is generating more income and may be able to raise its dividend. If FFO is flat or falling, the dividend is at risk.
How to get your free guide with your first REIT investment
Open a brokerage account if you do not have one. You will need your Social Security number, a government ID, and proof of address (a utility bill or bank statement works). The process takes 10 to 15 minutes online, and most brokerages fund your account within one to three business days.
Decide whether you want to own individual REITs or a fund. If you are new to real estate investing, a REIT ETF is simpler — you buy one ticker symbol and own dozens of properties across the country. If you have a specific interest (apartment buildings, data centers, medical facilities), research individual REITs in that sector and compare their yields, payout ratios, and debt levels.
Place your order during market hours (9:30 a.m. to 4 p.m. Eastern time on weekdays). You can set a limit order (buy only if the price drops to a certain level) or a market order (buy at the current price immediately). Most brokerages charge no commission on stock and ETF trades.
Set up dividend reinvestment (DRIP) if you want the cash payments automatically used to buy more shares, or leave it off if you want the cash deposited to your account. Either way, you will owe taxes on the dividends at the end of the year.
Frequently Asked Questions
Can I lose money investing in a REIT?
Yes. REIT share prices fall when interest rates rise, when the real estate market weakens, or when a specific REIT mismanages its properties or takes on too much debt. You can also lose money if you buy a REIT and the dividend is cut — the share price typically drops when that happens. REITs are less volatile than individual stocks but more volatile than bonds.
Do I have to hold a REIT for a certain amount of time?
No. You can buy and sell REIT shares anytime the market is open, just like any stock. However, if you sell within a year of buying, any gain is taxed as a short-term capital gain (at your ordinary income rate). If you hold for more than a year, the gain is taxed at the lower long-term capital gains rate.
What is the difference between a REIT and a real estate mutual fund?
A REIT is a company that owns real estate. A real estate mutual fund is a collection of REIT shares (and sometimes other real estate investments) managed by a fund company. When you buy a REIT fund, you own pieces of many REITs at once. Most investors find this simpler than picking individual REITs.
Can I buy REITs in a retirement account?
Yes. REITs work in traditional IRAs, Roth IRAs, 401(k)s, and other tax-advantaged accounts. This is actually a smart place to hold them because you avoid the ordinary income tax on dividends. Many financial advisors suggest keeping REITs in retirement accounts and holding stocks in taxable accounts for tax efficiency.
What happens to my REIT shares if the company goes bankrupt?
You lose your investment. Shareholders are last in line to be paid if a company fails — creditors and bondholders get paid first. This is rare for large, established REITs but possible for smaller or highly leveraged ones. Diversifying across multiple REITs or buying a REIT fund reduces this risk.