A real estate investment trust (REIT) is a company that owns income-producing properties and pays out most of its profits to shareholders

A real estate investment trust, or REIT, is a business structure that lets you own a piece of real estate without buying property yourself. The REIT buys and manages buildings—apartments, offices, warehouses, shopping centers, hotels—and collects rent or lease payments. Instead of keeping all that money, REITs must distribute at least 90 percent of their taxable income to shareholders each year. That distribution is how you make money: you own shares, the REIT pays you a portion of what it collects.

For homeowners, REITs matter because they're a different way to think about real estate as an investment. You already own one piece of real estate—your house. A REIT lets you own pieces of many properties across different cities and property types without the work of being a landlord, without a down payment of hundreds of thousands of dollars, and without a mortgage.

Key Takeaways

  • REITs are companies that own and manage income-producing properties and must distribute 90 percent of taxable income to shareholders annually.
  • You buy REIT shares through a brokerage account the same way you buy stock, and the price changes daily based on market demand.
  • REIT dividends are taxed as ordinary income, not capital gains, which means the tax bill can be higher than other investments.
  • REITs give you real estate exposure without being a landlord, but they also mean you have no control over which properties the company buys or how they're managed.

How REITs are structured and what they own

A REIT is a legal structure created by federal law. To may have access to as a REIT, a company must own real estate that produces income—rent, lease payments, or fees—and it must be organized so that shareholders own it. The company can be publicly traded (listed on a stock exchange like the New York Stock Exchange) or private (shares sold only to certain investors).

REITs own different kinds of property. Some own apartment buildings and collect residential rent. Others own office parks, shopping malls, warehouses, data centers, hospitals, or hotels. A single REIT might own dozens of properties across multiple states. That diversification is one reason homeowners consider them: you get exposure to real estate across geographies and property types without picking individual properties yourself.

The difference between publicly traded and private REITs

A publicly traded REIT is listed on a stock exchange. You buy and sell shares through any brokerage account—the same account you'd use to buy Apple or Ford stock. The price moves throughout the trading day based on what buyers and sellers are willing to pay. You can sell your shares quickly if you need cash. Examples include Realty Income, Prologis, and Welltower, though there are hundreds of publicly traded REITs.

A private REIT is not listed on an exchange. Shares are sold directly by the REIT, usually through financial advisors, and there's no daily market price. You typically can't sell your shares easily—some private REITs have holding periods of five to ten years or longer. Private REITs often have higher minimum investments and higher fees. They appeal to investors with longer time horizons and larger amounts of money to invest.

For most homeowners exploring REITs, publicly traded REITs are the practical choice because they're accessible, liquid, and transparent.

How REIT dividends work and what you owe in taxes

When a REIT collects rent and other income, it must distribute at least 90 percent of its taxable income to shareholders. That distribution is usually paid quarterly—four times a year. If you own 100 shares of a REIT that distributes $2 per share annually, you receive $200 per year in dividends, typically in four $50 payments.

The tax treatment of REIT dividends is important and often surprises investors. REIT dividends are taxed as ordinary income, the same rate as your salary or wages. They are not taxed as capital gains, which are usually taxed at lower rates. If you're in the 24 percent federal tax bracket and receive $200 in REIT dividends, you owe roughly $48 in federal tax on that income. If those same $200 came from a stock dividend taxed as a long-term capital gain, you might owe only $30. The difference adds up over time, especially in tax-advantaged accounts like IRAs or 401(k)s, where REIT dividends are not taxed annually.

What you control and what you don't

When you own a rental property, you decide which tenants to accept, how much rent to charge, what repairs to make, and when to sell. When you own REIT shares, you own none of that. The REIT's management team makes all those decisions. You have a vote as a shareholder—you can attend annual meetings and vote on the board of directors—but you have no say in individual property decisions.

This is a trade-off. The upside is that you don't have to manage tenants, collect rent, or fix a broken furnace at 2 a.m. The downside is that if the REIT makes poor decisions—overpays for a property, mismanages a building, or enters a market at the wrong time—you're along for the ride. You can sell your shares, but you can't change the company's strategy.

The costs and fees involved in REIT investing

Publicly traded REITs have minimal fees because they're traded on exchanges like any stock. You pay a brokerage commission when you buy or sell (often zero at major brokerages), and that's it. The REIT itself has operating costs—property management, maintenance, staff—but those are already factored into the share price and dividend amount.

Private REITs are different. They often charge upfront fees of 5 to 10 percent of your investment just to buy in. They charge annual management fees of 1 to 2 percent of your investment. Some charge exit fees when you sell. Over time, those fees significantly reduce your returns. A private REIT that charges 7 percent upfront and 1.5 percent annually needs to outperform a publicly traded REIT by at least that much just to break even.

How REIT returns compare to other investments

REIT returns come from two sources: dividend income and share price appreciation. A REIT might pay a 3 percent dividend yield (meaning if you buy shares at $100, you receive $3 per year in dividends) and also appreciate 5 percent per year as the underlying properties gain value. That's an 8 percent total return. Or it might pay a 4 percent dividend and decline 2 percent in share price, for a 2 percent total return.

Over long periods, REITs have historically returned around 9 to 10 percent annually, though past performance doesn't predict future results. That's comparable to stock market returns, though with different timing and volatility. REITs tend to move differently than stocks—sometimes they rise when stocks fall, which is why some investors use them for diversification. But REITs also carry real estate risk: if commercial property values fall, or if interest rates rise and make borrowing more expensive for the REIT, share prices can drop.

Frequently Asked Questions

Can I buy a REIT inside my IRA or 401(k)?

Yes. Publicly traded REITs can be held in any retirement account. This is actually advantageous because REIT dividends are taxed as ordinary income, but inside a retirement account they're not taxed annually. You only pay taxes when you withdraw money from the account. Private REITs can sometimes be held in IRAs, but rules vary by custodian.

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

For publicly traded REITs, no. You can buy a single share through any brokerage account, and share prices range from $20 to $200 or more depending on the REIT. Private REITs typically require $25,000 to $100,000 minimum investments, sometimes more.

What happens if a REIT cuts its dividend?

The share price usually falls because investors buy REITs partly for the dividend income. If a REIT cuts its dividend, it signals that the company is struggling or expects lower income ahead. You can sell your shares at any time if you own a publicly traded REIT, but you'll likely sell at a lower price than you paid.

Are REITs safer than owning rental property?

They're different risks. With a rental property, you control the decisions but carry all the risk yourself. With a REIT, risk is spread across many properties and many investors, but you have no control. Neither is inherently safer—it depends on the specific property or REIT and your ability to manage it.