How to buy a REIT and what happens after
You buy a REIT the same way you buy a stock: through a brokerage account. Open an account with a broker (Fidelity, Vanguard, Charles Schwab, and others offer them), deposit money, search for the REIT by its ticker symbol, and place an order. The transaction settles in two business days, and you own shares. You do not need to pick a property, manage tenants, or arrange financing — the REIT's management company does that work and distributes the income to you.
After you buy, you receive distributions (usually quarterly) from the REIT's rental income and property sales. These distributions are taxed as ordinary income, not capital gains, which means you pay your regular tax rate on them. You can also sell your shares anytime the market is open, just as you would sell any stock. The price moves based on market demand and the REIT's performance, so you may sell for more or less than you paid.
Key Takeaways
- You need a brokerage account to buy REIT shares; most major brokers offer them with no minimum deposit or trading fees.
- REIT distributions are taxed as ordinary income, not capital gains, so your tax bill depends on your income bracket and the amount you receive.
- You can sell REIT shares anytime during market hours, making them more liquid than owning physical property.
- REITs must distribute at least 90 percent of taxable income to shareholders, so most pay higher yields than stocks, but that income is taxable every year.
Choosing a brokerage and opening an account
Any brokerage that offers stock trading also offers REIT shares. Common choices include Fidelity, Vanguard, Charles Schwab, E*TRADE, and TD Ameritrade, but smaller brokers work too. Most have no account minimum, no annual fee, and no commission on stock trades. You will need to provide your name, address, Social Security number, and employment information; the broker verifies this with the IRS and other agencies.
The account setup takes 10 to 15 minutes online. You then link a bank account and deposit money — most brokers let you start with any amount. Some people open a regular taxable brokerage account; others use an IRA or 401(k) if they want the tax deferral. REIT distributions inside an IRA are not taxed until you withdraw, which can save money over time. Inside a 401(k), you can only buy REITs if your plan offers a self-directed brokerage window.
Finding and researching individual REITs
Once your account is funded, search for REITs by ticker symbol. You can find tickers on financial websites like Yahoo Finance, Google Finance, or your broker's research tools. Type the REIT's name or ticker, and the site shows the current price, dividend yield, and basic information about what properties it owns.
Before you buy, look at the dividend yield (the annual distribution divided by the share price), the REIT's occupancy rate (what percentage of its properties are rented), and its debt level. A yield that looks very high compared to other REITs in the same sector may signal trouble. Check the REIT's annual report (Form 10-K) or investor relations page to see which properties it owns, how much debt it carries, and what the management team says about the business. You can also read analyst reports on financial websites, though remember that paid research sometimes favors certain companies.
Understanding REIT types and sectors
REITs specialize in different property types, and each has different risks and income patterns. Apartment REITs own residential buildings; office REITs own commercial office space; retail REITs own shopping centers and malls; industrial REITs own warehouses and distribution centers; healthcare REITs own hospitals, senior living facilities, and medical offices. Some REITs own a mix of property types.
Each sector performs differently depending on the economy. Apartment REITs tend to be stable because people always need housing, but they are sensitive to local job markets and population trends. Office REITs have struggled since the pandemic because many companies downsized their office space. Retail REITs were hurt by online shopping but have stabilized as stores adapted. Industrial REITs have performed well because e-commerce demand for warehouse space is high. Healthcare REITs are stable but sensitive to changes in Medicare and insurance reimbursement rates. Diversifying across sectors reduces the risk that one type of property will underperform.
Tax treatment of REIT distributions and capital gains
REIT distributions are taxed differently than stock dividends. Most REIT distributions are taxed as ordinary income at your regular tax rate, not the lower capital gains rate. If you are in the 24 percent tax bracket, a REIT distribution is taxed at 24 percent, not 15 or 20 percent. Some REIT distributions may may have access to for a 20 percent deduction if you meet certain income limits, but this is not may provide and depends on the REIT and your situation.
You also owe tax on capital gains when you sell REIT shares for more than you paid. If you hold the shares for more than one year, the gain is taxed at the long-term capital gains rate (0, 15, or 20 percent depending on income). If you sell within one year, it is taxed as ordinary income. Because distributions are taxed every year whether you sell or not, many people hold REITs in tax-deferred accounts like IRAs to avoid the annual tax bill.
Buying REIT funds instead of individual REITs
Instead of picking individual REITs, you can buy a REIT mutual fund or exchange-traded fund (ETF) that holds many REITs at once. Examples include Vanguard Real Estate ETF (VNQ), iShares U.S. Real Estate ETF (IYR), and Schwab U.S. REIT ETF (SCHH). These funds own dozens or hundreds of REITs across all sectors, so you get instant diversification without researching individual companies.
REIT funds charge an annual expense ratio (usually 0.1 to 0.5 percent of your investment per year) to cover management costs. Individual REITs have no ongoing fee, but you have to research and monitor them yourself. REIT funds are simpler for beginners and require less time to manage. The tax treatment is the same: distributions are taxed as ordinary income, and capital gains are taxed when you sell.
Common mistakes and what to watch for
One mistake is chasing yield. A REIT that pays 8 or 10 percent when most others pay 3 or 4 percent may be cutting corners or facing trouble. Check the occupancy rate and debt level before assuming the high yield is a bargain. Another mistake is buying REITs only in one sector — if you own only office REITs, you are betting that office real estate will recover, which may not happen.
A third mistake is not accounting for taxes. If you buy a REIT that pays 5 percent and you are in the 24 percent tax bracket, your after-tax return is about 3.8 percent. That is still reasonable, but it is lower than the headline yield suggests. Holding REITs in a tax-deferred account solves this problem. Finally, do not assume REIT prices never fall. Like stocks, REIT share prices move with market sentiment and interest rates. If interest rates rise, REIT prices often fall because investors can earn higher returns elsewhere.
Frequently Asked Questions
Do I need a lot of money to start buying REITs?
No. Most brokers have no account minimum, and REIT shares cost anywhere from $20 to $200 per share depending on the REIT. You can buy a single share or a few shares to start. Some brokers also offer fractional shares, so you can invest any dollar amount, even $10 or $50.
Can I lose money on a REIT?
Yes. REIT share prices fall when interest rates rise, when the real estate market weakens, or when the REIT's properties underperform. You can sell for less than you paid. However, if you hold the shares and collect distributions, the income may offset some losses over time.
What is the difference between a REIT and a real estate mutual fund?
A REIT is a company that owns real estate and distributes income to shareholders. A real estate mutual fund is a fund that holds REIT shares and other real estate investments. A REIT fund gives you diversification across many REITs; an individual REIT gives you ownership in one company.
Should I hold REITs in a regular account or an IRA?
An IRA is usually better because REIT distributions are taxed as ordinary income every year. Inside an IRA, distributions are not taxed until you withdraw, which can save significant money over time. A regular account makes sense if you want to access the money before retirement age without penalties.
How often do REITs pay distributions?
Most REITs pay quarterly distributions, meaning four times per year. Some pay monthly. The amount varies by REIT and can change if the company's income rises or falls. Check the REIT's investor relations page to see the payment schedule and history.