A REIT is a company that owns income-producing real estate and pays most of its profits to shareholders

A Real Estate Investment Trust (REIT) is a corporation that buys, owns, and manages real estate — office buildings, apartments, shopping centers, warehouses, hotels, or data centers — and distributes the income from those properties to people who own shares in the company. REITs are required by law to pay out at least 90 percent of their taxable income as dividends to shareholders each year. That requirement is what makes them different from a regular real estate company: the structure forces regular cash payouts.

You buy REIT shares the same way you buy stock — through a brokerage account, often in a retirement account like an IRA or 401(k). You own a piece of the company and the properties it holds, but you do not own the properties directly and you do not manage them. The REIT's management team handles all the tenant relations, maintenance, leasing, and day-to-day operations.

Key Takeaways

  • REITs own and manage income-producing real estate and must distribute at least 90 percent of taxable income to shareholders as dividends each year.
  • You buy REIT shares through a brokerage account like any stock, giving you real estate exposure without owning property directly or managing tenants.
  • REITs are organized by property type — residential, commercial, industrial, healthcare — so you can target specific real estate sectors.
  • REIT dividends are taxed as ordinary income, not capital gains, which means the tax bill can be higher than with other investments.
  • REITs trade on public exchanges during market hours, so their share price moves with market demand rather than the actual value of the underlying properties.

How REITs generate income and pay dividends

REITs make money from rent collected from tenants in the properties they own. They also earn income from property sales and, in some cases, from lending money to other real estate developers. After paying operating expenses — property taxes, maintenance, insurance, staff salaries, and debt service on mortgages — the REIT takes the remaining profit and distributes most of it to shareholders as dividends.

The dividend payment is the main reason people invest in REITs. If a REIT owns a portfolio of apartment buildings generating steady rent, shareholders receive regular cash payments. The amount varies depending on how much profit the REIT made that quarter or year, but the structure ensures that most of the income flows to you rather than being reinvested in the company or held as cash.

Types of REITs organized by property class

REITs specialize in different kinds of real estate, and each type has different risk and income characteristics. Residential REITs own apartments and single-family rental homes. Commercial REITs own office buildings and retail space. Industrial REITs own warehouses and distribution centers. Healthcare REITs own medical office buildings, senior living facilities, and hospitals. Specialty REITs own data centers, cell towers, self-storage facilities, or other niche properties.

The property type matters because different sectors perform differently depending on economic conditions. During a recession, office REITs may struggle if companies reduce their real estate footprint, while industrial REITs may thrive if e-commerce shipping increases. Residential REITs tend to be more stable because people always need housing, but they may offer lower dividend yields than riskier sectors.

Public REITs versus private REITs

Public REITs trade on stock exchanges like the NYSE or NASDAQ. You can buy and sell shares during market hours at the current market price, the same way you trade any stock. Public REITs are regulated by the SEC, file regular financial reports, and their share prices are transparent and liquid.

Private REITs are not listed on public exchanges. They are sold directly to investors, often through financial advisors, and you cannot easily sell your shares if you need cash. Private REITs typically have higher minimum investments and longer lock-up periods, but they may offer higher dividend yields because they are less liquid. Most individual investors encounter public REITs first because they are easier to buy and understand.

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 own a REIT in a taxable brokerage account, you will owe income tax on the full dividend amount at your regular tax rate, which can be 22 percent, 24 percent, or higher depending on your income bracket.

This tax treatment is one reason many investors hold REITs in tax-advantaged accounts like IRAs or 401(k)s, where dividends are not taxed annually. In those accounts, the dividends can compound without an annual tax bill, and you only pay taxes when you withdraw money in retirement. If you hold REITs in a regular brokerage account, factor the tax cost into your expected return.

How REIT share prices move versus property values

The price of a REIT share on the stock exchange does not always track the actual value of the properties the REIT owns. Share prices move based on investor demand, interest rates, market sentiment, and the REIT's financial performance — the same forces that move any stock price. A REIT's properties might be worth $100 million, but if investors are pessimistic about the real estate market, the REIT's shares might trade at a discount to that underlying value.

This disconnect creates both opportunity and risk. If a REIT's shares are trading below the value of its properties, some investors see it as undervalued. If shares are trading at a premium, it may signal investor optimism but also higher risk if sentiment shifts. The underlying properties are real and generate income, but the share price is a market price, not a direct reflection of property value.

Risks and trade-offs of REIT investing

REITs are not risk-free. Interest rate increases can hurt REIT share prices because higher rates make bonds and savings accounts more attractive, reducing demand for dividend-paying stocks. Rising property taxes, insurance costs, or maintenance expenses can squeeze profit margins and reduce dividends. Vacancy rates — the percentage of units not rented — directly affect income, so a recession that causes tenants to move or close businesses can hurt REIT performance.

REITs also carry market risk. Share prices fluctuate daily, so if you need to sell shares quickly, you might have to accept a lower price than you paid. Sector-specific risks matter too: office REITs face long-term headwinds from remote work, while retail REITs compete with e-commerce. Diversifying across REIT types or holding REITs alongside other investments can reduce concentration risk.

Frequently Asked Questions

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

No. Public REITs trade like stocks, so you can buy a single share for whatever the current market price is — often $50 to $150 per share. Many brokerages allow fractional share purchases, so you can invest any dollar amount. Private REITs typically require minimum investments of $25,000 to $100,000 or more.

Can I lose money investing in a REIT?

Yes. REIT share prices can fall if the market turns pessimistic, if interest rates rise, or if the REIT's properties underperform. You can also lose money if the REIT cuts its dividend or goes bankrupt, though that is rare for large, established REITs. The dividend itself is not may provide and can change quarter to quarter.

Are REITs a good way to invest in real estate without buying property?

REITs offer real estate exposure without the work of being a landlord — no tenant calls, no maintenance emergencies, no property taxes to pay. But you also have no control over which properties are bought or sold, and you cannot deduct losses or depreciation like you can with direct property ownership. REITs work best as part of a diversified portfolio, not as a substitute for direct real estate if you want hands-on control.

What happens to my REIT shares if the company is acquired?

If another company buys the REIT, shareholders typically receive either cash or shares in the acquiring company, depending on the deal structure. The acquiring company may be another REIT, a private equity firm, or a larger corporation. Your shares do not simply disappear — you receive compensation based on the acquisition price negotiated by the boards.

Can I hold REITs in a retirement account?

Yes. REITs can be held in IRAs, 401(k)s, and other tax-advantaged retirement accounts. This is actually a common strategy because REIT dividends are taxed as ordinary income, so holding them in a tax-deferred account avoids the annual tax bill. You pay taxes only when you withdraw money in retirement.