A real estate investment trust is a company that owns and operates income-producing properties, and you can buy shares in it like a stock

A real estate investment trust (REIT) pools money from many investors to buy, manage, and operate real estate — apartments, office buildings, shopping centers, warehouses, hotels, or medical facilities. When you buy shares of a REIT, you own a piece of that portfolio. The REIT collects rent from tenants, pays operating costs and debt service, and distributes most of its remaining profit to shareholders as dividends. You do not own the property itself or manage it; you own a financial stake in the company that does.

REITs exist because federal law created them in 1960 to let regular investors access real estate returns without buying whole buildings. To may have access to as a REIT, a company must own at least 75 percent real estate assets, distribute at least 90 percent of taxable income to shareholders, and meet other structural rules. This legal structure is what makes REITs different from buying a rental property directly or investing in a real estate mutual fund.

Key Takeaways

  • A REIT is a company that owns income-producing real estate and distributes most profits to shareholders as dividends, which you receive regularly.
  • You buy and sell REIT shares on a stock exchange just like any other stock, so your money is liquid and you can exit quickly.
  • REITs must own at least 75 percent real estate assets and distribute at least 90 percent of taxable income, which is why they pay higher dividends than most stocks.
  • REIT dividends are taxed as ordinary income, not capital gains, so the tax bill can be steeper than other investments.
  • REITs let you diversify across property types and geographies without the work of being a landlord, but you have no control over which properties the company buys or sells.

How REIT dividends and returns work

When a REIT collects rent and other income from its properties, it pays operating expenses, debt payments, and capital improvements. The remainder is distributed to shareholders, usually quarterly. Because REITs must distribute at least 90 percent of taxable income, they typically pay dividends of 3 to 6 percent or higher — well above the yield on most stocks. That income is the main reason many investors hold REITs.

Your total return comes from two sources: the dividend you receive and any change in the share price. If a REIT owns properties in a hot market or manages them efficiently, the share price may rise. If the real estate market softens or the REIT makes poor acquisition decisions, the price can fall. Unlike owning a rental property, you do not control the outcome — you depend on the REIT's management team to make sound decisions.

The tax treatment of REIT dividends

REIT dividends are taxed as ordinary income, not as capital gains. This means they are taxed at your regular income tax rate — potentially 22, 24, 32, 35, or 37 percent depending on your bracket — rather than the lower long-term capital gains rates of 0, 15, or 20 percent. For investors in high tax brackets, this is a significant disadvantage compared to owning stocks that pay capital gains or to owning rental property directly, where you can deduct depreciation and other expenses.

If you hold REITs in a tax-deferred account like a traditional IRA or 401(k), the tax treatment does not matter because you do not pay tax on the dividends until you withdraw. Many investors use tax-advantaged accounts specifically to hold REITs for this reason.

Liquidity and ease of buying or selling

REIT shares trade on stock exchanges during market hours, so you can buy or sell in seconds at the current market price. This liquidity is a major advantage over owning rental property, where selling takes months and involves real estate agents, inspections, and closing costs. If you need cash quickly or want to shift your portfolio, you can exit a REIT position immediately.

The trade-off is volatility. REIT share prices move with market sentiment, interest rates, and economic conditions. A single bad earnings report or a rise in mortgage rates can cause a REIT's stock to drop 10 or 20 percent in a day. A rental property you own directly does not fluctuate in value that way — the market price changes slowly and you see it only when you sell.

Types of REITs and how they differ

REITs specialize in different property types, and each carries different risks and returns. Residential REITs own apartments and single-family rentals. Retail REITs own shopping centers and malls — a sector that has struggled as online shopping grows. Office REITs own commercial buildings, a sector hit hard by remote work trends. Industrial REITs own warehouses and logistics facilities, which have thrived as e-commerce expanded. Healthcare REITs own medical offices, senior housing, and hospitals. Data center REITs own the facilities that power cloud computing and artificial intelligence.

You can also buy diversified REITs that own multiple property types across many regions, which spreads risk. Or you can buy a REIT focused on a single city or property type if you have conviction about that market. Some REITs are publicly traded on major exchanges like the NYSE or NASDAQ, while others are non-traded and sold through brokers or financial advisors — these are less liquid and carry higher fees.

Comparing REITs to owning rental property directly

Owning a rental property gives you control: you choose the property, set the rent, manage the tenant, and claim tax deductions for mortgage interest, property taxes, repairs, and depreciation. You also benefit from leverage — borrowing 75 or 80 percent of the purchase price to control an asset worth much more. If the property appreciates, your equity grows faster than if you had paid cash. But you also do the work: screening tenants, handling maintenance calls, managing vacancies, and dealing with problem renters.

A REIT gives you passive income and diversification without the work or the leverage. You do not choose which properties to own, you cannot deduct operating expenses against the dividend income, and you do not benefit from leverage the same way. But you also do not spend weekends fixing toilets or dealing with evictions. For many homeowners, a REIT is a way to own real estate exposure without becoming a landlord.

Risks specific to REITs

Interest rate risk is the biggest threat to REIT values. REITs borrow money to buy properties, so when interest rates rise, their borrowing costs increase and their profits shrink. Rising rates also make bonds and savings accounts more attractive to investors, so they sell REIT shares to chase higher yields elsewhere. This is why REIT prices often fall when the Federal Reserve raises rates.

Property-type risk matters too. A retail REIT that owns malls faces structural decline as shopping moves online. An office REIT faces uncertainty as companies adopt hybrid work. A residential REIT in a city with rent control faces caps on income growth. Before buying a REIT, understand what properties it owns and what headwinds that sector faces. Diversified REITs reduce this risk but may offer lower returns than specialized ones.

Management risk is also real. A REIT's board and executives make acquisition, financing, and operational decisions that directly affect your returns. Poor decisions compound over time. Read the REIT's annual report and proxy statement to understand the management team's track record and compensation structure.

How to research and compare REITs

Start by identifying the property type and geography that interest you. Then look at the REIT's dividend yield, payout ratio, funds from operations (FFO), and debt-to-assets ratio. Dividend yield tells you the annual income as a percentage of the share price. Payout ratio shows what percentage of earnings the REIT distributes — above 90 percent is normal but leaves little room for growth or downturns. FFO is a REIT-specific metric that adjusts net income for depreciation and other non-cash items; it is a better measure of true earning power than standard net income.

Debt-to-assets shows how much the REIT borrows relative to what it owns. Higher leverage amplifies returns in good times but increases risk in downturns. Compare these metrics across several REITs in the same sector to see which is managed most conservatively. Read analyst reports and the REIT's quarterly earnings calls to understand management's strategy and outlook. Most brokers offer REIT research tools and screeners that let you filter by property type, yield, and other criteria.

Frequently Asked Questions

Can I buy a REIT through my brokerage account?

Yes. Publicly traded REITs trade on stock exchanges like any stock, so you can buy them through any brokerage account — online brokers, traditional brokers, or your employer's 401(k) plan. Non-traded REITs are sold through financial advisors and brokers but are harder to buy and sell and carry higher fees.

Do I have to pay capital gains tax when I sell REIT shares?

Yes. When you sell REIT shares for more than you paid, you owe capital gains tax on the profit. The rate depends on how long you held the shares — long-term capital gains (held over one year) are taxed at 0, 15, or 20 percent depending on income; short-term gains are taxed as ordinary income. The dividends you received are also taxed as ordinary income, separate from any capital gain or loss on the sale.

What happens if a REIT cuts its dividend?

The share price usually falls because investors buy REITs primarily for the dividend income. A dividend cut signals that the REIT's earnings have declined or that management expects trouble ahead. If you own the REIT, you will receive less income going forward. Some REITs cut dividends temporarily during downturns and restore them later; others cut permanently if the underlying business has weakened.

Can I lose money in a REIT?

Yes. REIT share prices fluctuate with market conditions, interest rates, and the performance of the underlying properties. If you buy a REIT at a high price and sell when the market is down, you lose money on the sale. You can also lose if the REIT cuts its dividend or if the properties it owns decline in value. REITs are not risk-free, though the regular dividend income can offset some losses over time.

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

A retirement account like a traditional IRA or 401(k) is usually better because REIT dividends are taxed as ordinary income. In a retirement account, you avoid that tax until you withdraw. In a regular brokerage account, you pay tax on every dividend, which reduces your after-tax return. If you have limited retirement account space, prioritize REITs there and hold other investments in taxable accounts.