What a REIT actually does with your money

A Real Estate Investment Trust (REIT) is a company that owns buildings, land, or mortgages and distributes the income from those properties to people who own shares in the company. You buy shares like you would buy stock. The REIT uses that money to purchase and manage real estate — office buildings, apartments, shopping centers, warehouses, hotels, data centers, or loans backed by property. When the property generates income through rent or mortgage payments, the REIT must pay out at least 90 percent of that income to shareholders as dividends.

The mechanics are straightforward: a REIT collects rent from tenants or interest from borrowers, covers operating costs and debt payments, and sends the remainder to you as a shareholder. You receive this payout quarterly or monthly depending on the REIT. The share price itself can also go up or down based on market demand, just like any stock.

REITs exist because federal law created them in 1960 to let ordinary people invest in large real estate portfolios without buying property directly. Before REITs, you needed millions of dollars to own a meaningful piece of commercial real estate. Now you can own a fraction of a skyscraper or a portfolio of 500 apartments for a few hundred dollars.

Key Takeaways

  • REITs own real estate or mortgages and must distribute at least 90 percent of their income to shareholders as dividends, usually paid quarterly or monthly.
  • You buy REIT shares through a brokerage account the same way you buy stock, and the share price fluctuates based on market demand.
  • Different REITs focus on different property types — apartments, offices, warehouses, hotels, or mortgages — so your income stream depends on which REIT you choose.
  • REIT dividends are taxed as ordinary income, not at the lower capital gains rate, which affects your actual take-home return.
  • REITs are required by law to distribute 90 percent of taxable income, so they reinvest less profit than typical companies and grow more slowly.

How REIT income flows to you as a shareholder

When you own shares in a REIT, you own a piece of every property the REIT holds. If the REIT owns 50 apartment buildings and collects $10 million in rent that month, your share of that income depends on what percentage of the company you own. A person holding 100 shares out of 1 million outstanding shares owns 0.01 percent of the company and receives 0.01 percent of the monthly payout.

The REIT's accounting team subtracts operating expenses — property taxes, maintenance, insurance, staff salaries, debt payments — from the gross rent collected. What remains is the taxable income that must be distributed. This is why REIT payouts vary month to month or quarter to quarter: they depend on actual property performance, not a fixed rate set in advance.

You receive your dividend as a cash payment deposited to your brokerage account. You can reinvest it to buy more shares, or withdraw it. The REIT sends you a tax form (1099-DIV) each January showing how much you received and how it should be reported on your tax return.

The difference between equity REITs and mortgage REITs

Equity REITs own the actual buildings and land. They collect rent from tenants and keep the property maintained. Their income rises when rents increase or when they buy properties at a discount and raise rents over time. Their income falls when vacancy rises or when maintenance costs spike. Most REITs are equity REITs.

Mortgage REITs do not own buildings. Instead, they lend money to real estate developers and property owners, secured by mortgages on the property. They collect interest payments from borrowers. Their income depends on interest rates and whether borrowers repay on time. Mortgage REITs tend to pay higher dividends than equity REITs but are more sensitive to interest rate changes — when rates fall, existing mortgage payments become less valuable, and when rates rise, new borrowers may default.

For a beginner, equity REITs are usually easier to understand because the income source is visible: you can see occupancy rates and rent levels. Mortgage REITs require more attention to interest rate forecasts and credit risk.

Why REIT share prices move independently from dividends

A REIT's share price and its dividend are two separate things. The dividend is the cash payout. The share price is what the market will pay for one share on any given day, and it changes based on supply and demand, just like any stock.

If a REIT owns apartment buildings in a city where rents are rising and vacancy is falling, investors may bid up the share price because they expect future dividends to grow. If interest rates rise and borrowing becomes expensive, investors may sell REIT shares because they can get better returns elsewhere, pushing the price down even if the current dividend is unchanged.

This means you can lose money on a REIT investment even if you receive regular dividend payments. If you buy shares at $50 and the price falls to $40, you have lost $10 per share even if you collected $3 in dividends. Conversely, if the price rises to $60, you have gained $10 per share plus the dividend.

How REITs are taxed differently from regular stocks

REIT dividends are taxed as ordinary income, not as capital gains. This is a significant tax disadvantage compared to stock dividends, which often may have access to for lower capital gains tax rates. If you are in the 24 percent tax bracket, a $1,000 REIT dividend costs you $240 in federal tax. A $1,000 stock dividend taxed at the 15 percent capital gains rate costs you $150.

This tax treatment is why REITs are often held in retirement accounts like IRAs or 401(k)s, where dividends are not taxed annually. In a taxable brokerage account, the tax drag reduces your actual return significantly.

When you sell REIT shares at a profit, that gain is taxed as a capital gain at the normal rates. Only the dividend portion receives ordinary income treatment. Some REIT dividends also include a return of capital, which is not taxed immediately but reduces your cost basis in the shares, deferring the tax until you sell.

What happens when a REIT buys or sells property

REITs constantly buy and sell properties to manage their portfolio. When a REIT sells a property at a profit, that gain is taxed at the corporate level before being distributed to shareholders. The REIT may also use sale proceeds to pay down debt, buy new properties, or increase the dividend payout.

If a REIT owns a property that declines in value — because the neighborhood deteriorates, a major tenant leaves, or interest rates make the property less attractive — the REIT may hold it and hope for recovery, or sell it and take the loss. A loss reduces the REIT's taxable income and may increase the dividend payout that year, but it also signals that management made a poor investment decision.

Large acquisitions or sales are announced to shareholders and can move the stock price significantly. A REIT that buys a trophy property at a premium price may see its share price fall if investors think the price was too high. A REIT that sells underperforming properties may see its price rise if investors believe management is improving the portfolio.

The 90 percent distribution requirement and its effect on growth

Federal law requires REITs to distribute at least 90 percent of their taxable income to shareholders. This means a REIT cannot reinvest most of its earnings back into the business the way a typical corporation does. A regular company might reinvest 70 percent of profits to expand and grow, paying out only 30 percent as dividends. A REIT must do the opposite.

This requirement is why REITs grow more slowly than other real estate companies. They cannot accumulate capital for major expansion. Instead, they must borrow money or issue new shares to fund acquisitions. This is also why REIT dividends tend to be higher than stock dividends — the payout is mandatory, not optional.

The 90 percent rule also means REIT management has less flexibility. They cannot weather a bad year by cutting the dividend and hoarding cash. If income falls, the dividend falls with it. This makes REIT dividends less stable than some investors expect.

Frequently Asked Questions

Can I lose money investing in a REIT?

Yes. The share price can fall if market conditions worsen or if the REIT's properties underperform. You can also lose money if you buy shares at a high price and sell at a lower price, even if you received dividend payments. REITs are not may provide investments.

Do I need a brokerage account to buy REIT shares?

Yes. You buy REIT shares through a brokerage account the same way you buy any stock. You can open an account at most banks or online brokerages. Some employers offer REIT options in their 401(k) plans, which is another way to own them.

What happens if a REIT cuts its dividend?

The share price usually falls because investors bought the REIT primarily for the dividend income. A dividend cut signals that the REIT's properties are not generating enough income to maintain the previous payout level. This can happen if vacancy rises, rents fall, or interest rates make debt more expensive.

Are REITs a good investment for retirement?

REITs can be part of a retirement portfolio because they provide regular income and real estate exposure. They are especially useful in tax-deferred accounts like IRAs because the ordinary income tax treatment does not apply. Whether they are right for you depends on your goals, risk tolerance, and overall portfolio.

How do I know which REIT to choose?

REITs differ by property type (apartments, offices, warehouses, data centers), geography, and management quality. Research the REIT's occupancy rate, rent growth, debt levels, and dividend history. Compare the dividend yield to other REITs and to other investments. Consider whether you want exposure to a specific property type or region.