A REIT is a company that owns real estate and pays you a share of the income it collects

A Real Estate Investment Trust (REIT) is a corporation that buys, owns, and operates income-producing properties — apartments, office buildings, warehouses, shopping centers, hotels, or data centers. Instead of keeping all the rental income, a REIT must distribute at least 90 percent of its taxable income to shareholders as dividends. You own a piece of the REIT by buying shares, just like you would buy stock in any other company.

The basic mechanics are straightforward: the REIT collects rent from tenants, pays operating costs and debt service, and sends the remainder to you and other shareholders. You receive this payment quarterly or monthly, depending on the REIT. The share price can also rise or fall based on market demand, property values, and the REIT's financial performance — so you can make money two ways: from dividends and from selling your shares at a higher price than you paid.

REITs trade on stock exchanges like the New York Stock Exchange, so you can buy and sell them through a brokerage account during market hours. You do not need to be wealthy or own property yourself. A single share might cost $50 to $200, and many people hold REIT shares inside retirement accounts like IRAs or 401(k)s.

Key Takeaways

  • A REIT owns real estate and must distribute 90 percent of taxable income to shareholders, usually as quarterly dividends.
  • You make money from REIT dividends (the income distribution) and from changes in the share price when you buy or sell.
  • REITs are traded on stock exchanges, so you can buy and sell shares through a brokerage account without owning property directly.
  • Different REITs own different property types — apartments, offices, warehouses, malls, hotels — so your income stream depends on which REIT you choose.
  • REIT dividends are taxed as ordinary income, not as capital gains, which affects how much you keep after taxes.

The three types of REITs and what they own

Equity REITs own the physical properties themselves. They collect rent from tenants, handle maintenance and property management, and pass the net income to you. Most REITs you will encounter are equity REITs. Examples include apartment REITs, office building REITs, and industrial warehouse REITs.

Mortgage REITs do not own properties. Instead, they lend money to property owners and collect interest payments. When a mortgage REIT receives interest income, it distributes that to shareholders. Mortgage REITs are riskier because they depend on borrowers paying back loans, and their dividends can be less stable than equity REITs.

Hybrid REITs do both — they own some properties and also hold mortgages on other properties. These are less common and sit somewhere between equity and mortgage REITs in terms of risk and income stability.

How dividends work and when you receive them

When a REIT collects rent and pays its expenses, the leftover money is taxable income. By law, the REIT must distribute at least 90 percent of that taxable income to shareholders. The board of directors decides how much to distribute each quarter, and that amount is divided by the number of shares outstanding to calculate the dividend per share.

If you own 100 shares of a REIT that declares a quarterly dividend of $0.50 per share, you receive $50 that quarter. Most REITs pay dividends four times a year, though some pay monthly. The payment lands in your brokerage account on the distribution date, and you can either reinvest it to buy more shares or take it as cash.

The dividend amount is not fixed. It changes based on how much income the REIT generates. If the REIT owns apartments and vacancy rises, rental income falls, and the dividend may drop. If the REIT refinances debt at a lower interest rate, expenses fall, and the dividend may rise. This is why REIT dividends are considered variable income, not may provide.

Share price movement and total return

The price of a REIT share moves up and down based on supply and demand in the market, just like any stock. If investors believe a REIT will grow its income and raise dividends, demand for shares rises and the price goes up. If investors worry about rising vacancy or interest rates, demand falls and the price drops.

Your total return from a REIT comes from two sources: the dividend you receive and the change in share price. If you buy a share for $100, receive $4 in dividends over a year, and sell it for $110, your total return is $14, or 14 percent. If the share price falls to $90, your return is negative $6 despite the $4 dividend.

This means REITs can be volatile in the short term. Interest rate changes affect both the dividend (because higher rates increase borrowing costs) and the share price (because investors compare REIT yields to bond yields). During periods of rising interest rates, REIT share prices often fall even if the dividend stays steady.

Tax treatment of REIT dividends

REIT dividends are taxed as ordinary income, not as capital gains. This is a significant difference from stock dividends, which often may have access to for lower capital gains tax rates. If you are in the 24 percent federal tax bracket and receive $1,000 in REIT dividends, you owe $240 in federal tax on that income (before any state taxes).

Some REIT dividends may include a small portion of return of capital, which is not taxed in the year you receive it but reduces your cost basis in the shares. Your REIT will send you a Form 1099-DIV each January that breaks down how much of your dividend is ordinary income, capital gains, and return of capital. Use this form when you file your taxes.

Because of this tax treatment, many investors hold REITs inside tax-deferred accounts like IRAs or 401(k)s, where dividends are not taxed until you withdraw the money. Holding REITs in a regular taxable brokerage account means paying taxes on dividends every year, even if you do not sell the shares.

How REITs compare to owning rental property directly

Owning a REIT share is fundamentally different from owning a rental property. With a REIT, you own a fractional piece of many properties managed by professionals. You receive dividends but have no control over which properties the REIT buys, how they are managed, or how much rent is charged. You cannot deduct mortgage interest or depreciation on your personal taxes because you do not own the property.

With direct property ownership, you control the property, can deduct expenses and depreciation, and keep all the income after expenses. But you also handle tenant problems, repairs, vacancies, and property management — or pay someone else to do it. Direct ownership requires significant capital upfront and is illiquid; selling a property takes months. A REIT share can be sold in seconds during market hours.

REITs offer liquidity, diversification across many properties, and professional management. Direct ownership offers control, tax deductions, and leverage through mortgages. Many investors use both: REITs in retirement accounts and direct property ownership for long-term wealth building.

Risks that affect REIT performance

Interest rate risk is the most immediate threat to REIT share prices. When the Federal Reserve raises interest rates, borrowing becomes more expensive for REITs, which reduces their profit margins. At the same time, investors can earn higher yields on bonds and savings accounts, making REIT dividends less attractive. Both effects push REIT share prices down.

Vacancy risk depends on the property type and economic conditions. An apartment REIT in a city with job losses faces higher vacancy and lower rent growth. An office REIT has faced structural vacancy increases as companies embrace remote work. A warehouse REIT benefits from e-commerce growth but faces risk if online shopping slows. Different property types carry different economic sensitivities.

Leverage risk matters because most REITs borrow money to buy properties. If a REIT has high debt relative to its income, rising interest rates or falling rents can squeeze the dividend or force the REIT to sell properties at unfavorable prices. REITs with lower debt are generally more stable but may offer lower dividends.

Frequently Asked Questions

Can I lose money in a REIT?

Yes. The share price can fall below what you paid, and you could sell at a loss. Dividends can also be cut if the REIT's income falls. However, if you hold the REIT long-term and reinvest dividends, you benefit from property appreciation and compound growth over time.

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

No. A single REIT share might cost $50 to $200, so you can start with a small amount. Many brokerages also offer fractional shares, allowing you to invest any dollar amount. Some retirement plans let you add REIT funds with no minimum.

What happens if a REIT cuts its dividend?

The share price usually falls because investors are receiving less income. However, a dividend cut sometimes signals that the REIT is preserving cash to weather a downturn or to invest in new properties. The long-term impact depends on whether the cut is temporary or permanent.

Are REIT dividends better than stock dividends?

REIT dividends are typically higher because REITs must distribute 90 percent of income. However, they are taxed as ordinary income, not capital gains, so you keep less after taxes. In a taxable account, the tax disadvantage often outweighs the higher yield. In a retirement account, the higher yield is a clear advantage.

How do I buy a REIT?

Open a brokerage account with a firm like Fidelity, Vanguard, or Charles Schwab. Search for the REIT by name or ticker symbol, and place a buy order just as you would for any stock. The share will settle in your account within two business days, and you will receive dividends automatically.