How to buy your first REIT investment

You buy REITs the same way you buy stocks: through a brokerage account. Open an account with a broker (Fidelity, Vanguard, Charles Schwab, and E*TRADE are common choices), fund it with money, search for the REIT by its ticker symbol, and place a buy order for the number of shares you want. The transaction settles in two business days, and you own the shares. There is no separate REIT application or approval process beyond what your broker requires to open the account.

You do not need a large amount of money to start. Individual REIT shares trade at prices ranging from under $10 to over $100 per share depending on the company. If you want exposure to multiple REITs without picking individual stocks, you can buy a mutual fund or exchange-traded fund (ETF) that holds a basket of REITs — these often cost less per share and spread your money across many properties and companies at once.

Before you buy, decide whether you want to hold REITs in a regular taxable brokerage account or inside a retirement account like an IRA or 401(k). REITs throw off significant taxable income (dividends are taxed as ordinary income, not capital gains), so many investors prefer to hold them in tax-sheltered retirement accounts where the dividends are not taxed until withdrawal.

Key Takeaways

  • You need a brokerage account with a broker like Fidelity or Vanguard, funded with your own money, to buy REIT shares.
  • Individual REIT shares range from under $10 to over $100, so you can start with a small amount of money.
  • REIT mutual funds and ETFs let you own pieces of many REITs at once, which reduces the risk of picking a single company.
  • REITs generate high dividend income that is taxed as ordinary income, so holding them in a retirement account (IRA or 401(k)) often saves you money on taxes.
  • You should research the REIT's property type, geographic focus, debt level, and dividend history before you buy.

Choosing between individual REITs and REIT funds

An individual REIT is a single company that owns and manages properties. You own a piece of that one company. Examples include Realty Income (ticker O), which owns retail and industrial properties, or Welltower (ticker WELL), which owns medical office and senior housing. When you pick individual REITs, you are betting on the management team, the quality of their properties, and the markets where they operate. If that company performs well, your shares gain value and you collect dividends. If it stumbles, you lose money.

A REIT mutual fund or ETF is a basket of many REITs managed by a fund company. Vanguard Real Estate ETF (VNQ) holds over 150 REITs. Schwab U.S. REIT ETF (SCHH) holds over 100. When you buy one share of the fund, your money is spread across all those companies and property types. If one REIT in the fund performs poorly, the impact on your overall return is small. This approach is less risky but also less exciting — your returns will be closer to the average REIT market return.

Most beginners should start with a REIT fund rather than individual REITs. You get instant diversification, lower fees than picking stocks yourself, and you do not have to research individual companies. Once you understand how REITs work and have read several annual reports, you can add individual REIT shares if you want.

What to look at before you buy

If you are considering an individual REIT, examine these four things. First, property type and location: does the REIT own office buildings, apartments, shopping centers, data centers, or hospitals? Are the properties in growing cities or declining ones? A REIT that owns office space in downtown San Francisco faces different risks than one that owns warehouses in Texas. Second, dividend yield: divide the annual dividend per share by the share price. A REIT trading at $50 per share that pays $3 per year in dividends has a 6% yield. Higher yields can signal good value or can signal that the market thinks the dividend is at risk — read recent earnings reports to tell the difference.

Third, debt level: look at the REIT's debt-to-equity ratio or debt-to-assets ratio in the annual report or on financial websites. REITs use debt to buy properties, so some debt is normal and expected. A ratio above 60% debt-to-assets means the company is borrowing heavily; if interest rates rise or property values fall, the REIT may cut its dividend to pay down debt. Fourth, occupancy rate: what percentage of the REIT's properties are rented out? A 95% occupancy rate is healthy. An 85% occupancy rate means the REIT is struggling to fill space and may have trouble paying dividends.

For REIT funds, you do not need to dig into individual companies. Instead, look at the fund's expense ratio (the annual fee charged by the fund company, usually 0.1% to 0.4% for REIT ETFs) and the fund's total return over the past three and five years. Compare funds side by side on financial websites like Morningstar or Yahoo Finance.

Setting up your brokerage account

Choose a broker based on account minimums, fees, and the research tools they offer. Most major brokers have no account minimum and charge no commission to buy or sell stocks or ETFs. Some brokers offer free educational content about investing; others offer lower expense ratios on their own funds. Open an account online by providing your name, address, Social Security number, and employment information. The broker will ask you to verify your identity and may ask about your investment experience.

After your account is approved, link a bank account and transfer money into your brokerage account. This usually takes one to three business days. Once the money is in your account, you can search for a REIT or REIT fund by ticker symbol, review the current price and recent performance, and place a buy order. You can place a market order (buy at the current price immediately) or a limit order (buy only if the price drops to a certain level). For most beginners, a market order is simpler.

Understanding REIT dividends and taxes

REITs are required by law to distribute at least 90% of their taxable income to shareholders as dividends. This is why REIT dividends are usually much higher than stock dividends — a typical stock might yield 2%, while a typical REIT yields 4% to 6%. The trade-off is that REIT dividends are taxed as ordinary income (at your regular income tax rate), not as capital gains (which are taxed at lower rates). If you earn $50,000 per year and receive $2,000 in REIT dividends, the IRS treats that $2,000 as income, and you pay tax on it at your ordinary income tax rate.

This is why holding REITs in a retirement account makes sense for many people. Inside a traditional IRA or 401(k), dividends are not taxed when you receive them — you only pay tax when you withdraw money in retirement. Inside a Roth IRA, dividends are never taxed. If you hold REITs in a regular taxable account, you will owe taxes on the dividends every year, even if you reinvest them and do not spend the money.

When you sell REIT shares for more than you paid, you also owe capital gains tax on the profit. If you held the shares for more than one year, the gain is taxed as a long-term capital gain (lower rate). If you held them for one year or less, it is taxed as a short-term capital gain (ordinary income rate).

Common mistakes beginners make

The first mistake is buying individual REITs without understanding the company. You read that a REIT has a high dividend yield and buy it without reading the annual report or understanding what properties it owns. Six months later, the dividend is cut and the share price falls. Avoid this by spending at least an hour reading about any individual REIT before you buy — look at the annual report, read analyst reports on financial websites, and understand the property type and markets.

The second mistake is chasing yield. A REIT offering a 10% dividend when most REITs yield 4% to 6% is a red flag. The market is pricing in the risk that the dividend will be cut. Do not assume a high yield means a good deal. The third mistake is holding REITs in a taxable account when you have room in a retirement account. If you have not maxed out your IRA or 401(k) for the year, put REIT money there first. The fourth mistake is panic-selling when the market drops. REITs are long-term holdings. Property values and rental income fluctuate, but over decades, real estate has been a stable source of income and growth.

Frequently Asked Questions

How much money do I need to start investing in REITs?

You can start with as little as $100 to $500. If you buy individual REIT shares, the minimum depends on the share price — if a REIT trades at $50 per share, you need at least $50 to buy one share. If you buy a REIT ETF, the minimum is the price of one share of the fund, often $50 to $100. Most brokers have no account minimum.

Can I hold REITs in an IRA or 401(k)?

Yes. In fact, this is often the best place to hold them because REIT dividends are taxed as ordinary income. Inside a traditional IRA or 401(k), the dividends are not taxed until you withdraw money. Inside a Roth IRA, they are never taxed. Check with your plan administrator or broker to confirm that REIT shares or REIT funds are available in your specific retirement account.

What is the difference between a REIT ETF and a REIT mutual fund?

Both hold baskets of many REITs. ETFs trade like stocks during market hours and often have lower expense ratios (0.1% to 0.3%). Mutual funds are priced once per day after the market closes and may have slightly higher fees (0.3% to 0.7%). For most beginners, ETFs are simpler and cheaper.

Do I need to do anything after I buy REIT shares?

If you own individual REITs, review the annual report once per year and watch for dividend cuts or major changes in the company's strategy. If you own a REIT fund, you can largely ignore it — the fund manager handles buying and selling individual REITs. Many investors set up automatic dividend reinvestment so dividends are used to buy more shares.

What happens if a REIT cuts its dividend?

The share price usually falls because investors buy REITs primarily for the dividend income. A dividend cut signals that the REIT is struggling to collect rent or is facing higher costs. This is why researching debt level and occupancy rate before you buy matters — these are early warning signs of trouble.