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

REIT stands for Real Estate Investment Trust. It is a corporation that buys, owns, and manages properties — apartments, office buildings, shopping centers, warehouses, or hotels — and then distributes the rental income and profits to people who own shares. You do not own the building itself; you own a piece of the company that owns it. The company must pay out at least 90 percent of its taxable income to shareholders each year, which is why REITs often pay higher dividends than regular stocks.

REITs exist because federal law created them in 1960 to let ordinary investors own real estate without having to buy an entire building. Before REITs, real estate ownership was mostly available to wealthy individuals and large institutions. A REIT lets you invest $100 or $1,000 and own a fractional stake in a portfolio of properties worth millions.

Key Takeaways

  • A REIT is a company that owns rental properties and pays out most of its income to shareholders as dividends, and you buy shares like you would buy stock.
  • REITs must own real estate that generates income — apartments, offices, warehouses, or hotels — and are regulated by the Securities and Exchange Commission.
  • You can buy REIT shares through a brokerage account, and they trade on stock exchanges during market hours just like any other stock.
  • REIT dividends are taxed as ordinary income, not as capital gains, so the tax treatment is different from owning property directly or owning regular stocks.
  • REITs are liquid (you can sell quickly) but their share price moves with the stock market, so you can lose money if the price drops.

How REITs make money and pay shareholders

A REIT generates revenue from rent paid by tenants. The company collects that rent, pays operating costs (maintenance, property taxes, insurance, management), and then distributes the leftover income to shareholders as dividends. The amount and timing of dividends depend on how much rent the REIT collects and how efficiently it runs its properties.

Some REITs also make money by buying properties, improving them, and selling them at a profit. Others focus purely on long-term ownership and rental income. The mix varies by REIT. A REIT that owns apartment buildings will have different revenue patterns than one that owns shopping malls or data centers.

Shareholders also benefit if the REIT's properties increase in value. If the company sells a property for more than it paid, that profit can be distributed or reinvested. If you hold REIT shares and the company's assets grow, the share price may rise, giving you a capital gain when you sell.

Types of REITs and what they own

REITs are divided by the type of property they own. Residential REITs own apartments, single-family rentals, or manufactured housing. Office REITs own commercial office buildings. Retail REITs own shopping centers and malls. Industrial REITs own warehouses and logistics facilities. Healthcare REITs own hospitals, medical offices, and senior living facilities. Specialty REITs own data centers, cell towers, or self-storage units.

Some REITs own only one type of property; others own a mix. A diversified REIT might own both apartments and office buildings. The type of property matters because different sectors perform differently depending on economic conditions, interest rates, and tenant demand.

You can also find mortgage REITs, which do not own properties but instead lend money to real estate developers and owners. Mortgage REITs buy mortgages and mortgage-backed securities and earn income from the interest. They work differently from property-owning REITs and carry different risks.

How to buy REIT shares and where they trade

Most REITs are publicly traded, meaning you can buy shares through any brokerage account — the same way you would buy Apple or Microsoft stock. You open an account with a broker (online brokers like Fidelity, Schwab, or Vanguard, or a traditional bank), deposit money, search for the REIT by its ticker symbol, and place an order. The transaction settles in two business days.

Publicly traded REITs trade on stock exchanges — primarily the New York Stock Exchange and NASDAQ — during regular market hours. You can buy and sell shares any trading day, which makes them liquid. You can also own REIT shares through mutual funds or exchange-traded funds (ETFs) that hold a basket of REITs, which spreads your risk across multiple companies.

Some REITs are not publicly traded. Non-traded REITs are sold through financial advisors and are not listed on an exchange. They are harder to sell, have higher fees, and are less transparent. Most individual investors stick with publicly traded REITs because they are easier to buy, sell, and research.

Tax treatment of REIT dividends and capital gains

REIT dividends are taxed as ordinary income, not as may have access to dividends. This means they are taxed at your regular income tax rate, which is usually higher than the capital gains rate. If you earn $50,000 a year and receive $2,000 in REIT dividends, that $2,000 is added to your income and taxed at your marginal rate — potentially 22 percent or higher, depending on your tax bracket.

By contrast, dividends from regular stocks can may have access to for lower capital gains rates (0, 15, or 20 percent) if you hold the stock long enough. This is one reason REITs are often held in tax-advantaged accounts like IRAs or 401(k)s, where dividends are not taxed annually.

If you sell REIT shares for more than you paid, you owe capital gains tax on the profit. If you hold the shares for more than one year, it is a long-term capital gain and taxed at the lower rate. If you sell within one year, it is a short-term gain and taxed as ordinary income.

Risks of investing in REITs

REIT share prices fluctuate with the stock market. If interest rates rise, REIT prices often fall because investors can get better returns from bonds, and higher rates make borrowing more expensive for the REIT. If the economy weakens and tenants stop paying rent or move out, the REIT's income drops and the share price may decline. You can lose money if you buy at a high price and sell when the price is lower.

REITs are also sensitive to sector-specific risks. An office REIT suffered when remote work became common and office vacancy rates rose. A retail REIT can struggle if e-commerce reduces foot traffic to shopping centers. A residential REIT faces risk if local rent control laws pass or if a major employer leaves the area.

Leverage is another risk. Many REITs borrow money to buy more properties, which magnifies returns when things go well but magnifies losses when they do not. If a REIT takes on too much debt and property values or rents fall, the company may struggle to service its loans.

How REITs differ from owning rental property directly

When you own a rental property directly, you control the property, set the rent, choose tenants, and handle maintenance. You can deduct mortgage interest, property taxes, repairs, and depreciation from your taxes. You also bear all the risk and do all the work — or pay a property manager to do it.

With a REIT, you own shares in a company, not the property itself. You have no control over which properties are bought or sold, how they are managed, or what rent is charged. You receive dividends but have no tax deductions. The REIT's professional managers make those decisions. In exchange, you get liquidity (you can sell your shares quickly), diversification (your money is spread across many properties), and lower capital requirements (you do not need $200,000 to buy a rental house).

REIT dividends are also taxed differently than rental income from a property you own. Rental income is ordinary income, but you can deduct expenses. REIT dividends are ordinary income with no deductions available to you as a shareholder.

Frequently Asked Questions

Do I need a lot of money to invest in a REIT?

No. You can buy a single share of a publicly traded REIT for anywhere from $20 to $200, depending on the company. Many brokers also allow fractional share purchases, so you can invest $50 or $100 if you want. The barrier to entry is much lower than buying a rental property.

Can I lose all my money in a REIT?

You can lose a significant portion of your investment if the share price falls, but you are unlikely to lose everything unless the REIT goes bankrupt, which is rare. REIT shares can drop 20, 30, or even 50 percent in a market downturn, but most REITs survive and eventually recover. Diversification — owning shares in multiple REITs or REIT funds — reduces this risk.

Are REITs a good investment for retirement?

REITs can be part of a retirement portfolio because they provide income and diversification. However, because REIT dividends are taxed as ordinary income, they work better in tax-advantaged accounts like IRAs or 401(k)s where you do not pay tax on dividends annually. In a regular taxable account, the tax drag can reduce your returns.

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 fund that holds shares in multiple REITs or real estate companies. A mutual fund gives you instant diversification across many REITs with a single purchase, but you pay a management fee. A single REIT gives you more control over which properties you own a stake in but concentrates your risk in one company.

Do REITs pay dividends every month?

Most REITs pay dividends quarterly, though some pay monthly or semi-annually. The frequency and amount vary by REIT. You can check the REIT's investor relations website or your brokerage account to see the dividend history and payment schedule before you buy.