A REIT is a company that owns or finances income-producing real estate, and you can buy shares in it like a stock

A Real Estate Investment Trust (REIT) is a corporation that pools investor money to buy, own, and manage properties — office buildings, apartments, shopping centers, warehouses, hotels, or medical facilities. Instead of buying a building yourself, you buy shares in the REIT, and the company distributes most of the income it collects from rent and property sales to shareholders. REITs trade on stock exchanges, so you can buy and sell them through a regular brokerage account.

The REIT structure exists because federal law requires it. To be a REIT, a company must own real estate assets, distribute at least 90 percent of its taxable income to shareholders each year, and meet other rules set by the Internal Revenue Service. In return, the REIT itself pays no corporate income tax — the tax burden shifts to the shareholders who receive the distributions.

REITs come in two main types. Equity REITs own the properties outright and collect rent. Mortgage REITs lend money to real estate developers and owners, collecting interest payments instead. Most individual investors encounter equity REITs because they behave more like traditional stocks and are easier to understand.

Key Takeaways

  • A REIT is a company that owns real estate or real estate debt, and you buy shares in it the way you would buy stock in any other company.
  • Equity REITs own properties and collect rent; mortgage REITs lend money to real estate owners and collect interest.
  • REITs must distribute at least 90 percent of taxable income to shareholders each year, which is why they often pay higher dividends than regular stocks.
  • You can buy REIT shares through any brokerage account, and they trade during regular stock market hours.
  • REIT dividends are taxed as ordinary income, not at the lower capital gains rate, which affects your tax bill.

How REITs generate income and pay shareholders

A REIT makes money the same way a landlord does: it collects rent from tenants. When a REIT owns an office park, it leases space to companies. When it owns apartments, it collects monthly rent from residents. When it owns a shopping center, it leases storefronts to retailers. The REIT also makes money when it sells a property at a profit.

By law, a REIT must return at least 90 percent of its taxable income to shareholders as dividends. This is why REIT dividends are often higher than dividends from regular companies — the payout is mandatory, not optional. If a REIT earns $100 million in taxable income, it must distribute at least $90 million to shareholders. The remaining 10 percent can be retained for operations, debt repayment, or new acquisitions.

The dividend you receive depends on how many shares you own and how much income the REIT generates. If you own 100 shares of a REIT that distributes $2 per share annually, you receive $200 per year. That payment comes from the rent the REIT collects, not from new investor money.

The difference between equity REITs and mortgage REITs

Equity REITs own physical properties. They buy office buildings, apartment complexes, warehouses, or hotels, then lease them to tenants and collect rent. Their income is stable when occupancy rates are high and tenants pay on time. Their value rises and falls with real estate prices and rental rates in their markets. Most REIT investors own equity REITs because the business model is straightforward: own property, collect rent, pay shareholders.

Mortgage REITs do not own property. Instead, they lend money to real estate developers and property owners, either by buying mortgages or by making new loans. They earn income from the interest borrowers pay. Mortgage REITs are more sensitive to interest rate changes — when the Federal Reserve raises rates, new mortgages become more expensive, and existing mortgage values fall. Mortgage REITs also carry more risk because borrowers can default on loans.

A third category, hybrid REITs, owns some properties and holds some mortgages, but these are less common and more complex. Most people who invest in REITs start with equity REITs in familiar property types like residential apartments or office buildings.

How to buy REIT shares and what it costs

You buy REIT shares through any brokerage account — the same account you would use to buy Apple stock or an index fund. Open an account with a broker like Fidelity, Charles Schwab, E-Trade, or your bank's investment arm, deposit money, and search for the REIT by its ticker symbol. REIT shares trade during regular stock market hours, so you can buy or sell any time the market is open.

The cost to buy a single share varies widely. Some REITs trade for $20 per share, others for $100 or more. You can also buy REIT mutual funds or exchange-traded funds (ETFs) that hold dozens of REITs, which spreads your money across many properties and reduces the risk that any single REIT performs poorly. ETFs that track REIT indexes often charge annual fees of 0.1 to 0.5 percent of your investment.

When you buy or sell REIT shares, your broker may charge a commission, though many brokers now offer commission-free stock trading. Check your broker's fee schedule before you open an account. Some brokers also offer dividend reinvestment programs (DRIPs) that automatically buy new shares with your dividend payments, which can lower your costs over time.

Tax treatment of REIT dividends and capital gains

REIT dividends are taxed as ordinary income, not at the lower capital gains rate that applies to stock dividends from most companies. If you earn $1,000 in REIT dividends and your tax bracket is 24 percent, you owe $240 in federal tax on that income. By contrast, if you earn $1,000 in may have access to dividends from a regular stock, you might owe only $150 in federal tax (at the 15 percent capital gains rate). This tax difference makes REITs less attractive in taxable accounts and more attractive in retirement accounts like IRAs or 401(k)s, where dividends are not taxed annually.

If you sell REIT shares for more than you paid, you owe capital gains tax on the profit. That tax is calculated the same way as for any stock: the difference between your purchase price and your sale price. 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 your income). If you hold them for one year or less, it is taxed as ordinary income.

Some REIT dividends may be classified as return of capital, which means the REIT is returning some of your original investment rather than distributing earnings. Return of capital is not taxed in the year you receive it, but it reduces your cost basis in the shares, which increases your taxable gain when you sell. Your REIT or broker will send you a Form 1099-DIV each January that breaks down how much of your dividend is ordinary income, capital gain, and return of capital.

Risks and downsides of REIT investing

REITs are not risk-free. When the real estate market weakens, property values fall and rents may decline, reducing REIT income and share prices. During recessions, tenants may default on rent or move out, leaving properties vacant. A REIT that owns office buildings faced significant headwinds after 2020 when remote work reduced demand for office space. A REIT that owns retail shopping centers faced pressure as e-commerce grew.

Interest rate risk affects both equity and mortgage REITs. When the Federal Reserve raises interest rates, borrowing becomes more expensive for REITs that need to refinance debt. Higher rates also make bonds and savings accounts more attractive relative to REIT dividends, which can push REIT share prices down. Mortgage REITs are especially sensitive to rate changes because their entire business depends on the interest rate environment.

REIT shares are also volatile. Because they trade like stocks, their prices fluctuate daily based on investor sentiment, market conditions, and company news. If you need to sell shares during a market downturn, you may have to accept a loss. REITs also carry management risk — if a REIT's leadership makes poor acquisition decisions or overpays for properties, shareholder returns suffer.

How REITs fit into a diversified portfolio

Real estate is considered a separate asset class from stocks and bonds, so adding REITs to a portfolio can reduce overall risk through diversification. When stock prices fall, real estate values and rents may remain stable or even rise, providing a cushion. However, REITs are not a perfect hedge — during severe recessions, both stocks and real estate decline together.

Financial advisors often suggest that REITs make up 5 to 15 percent of a diversified portfolio, depending on your age, risk tolerance, and investment goals. Younger investors with decades until retirement can tolerate more volatility and may hold a smaller REIT allocation. Investors nearing retirement who want steady income may hold a larger allocation because REIT dividends provide regular cash flow.

The easiest way to add REIT exposure is through a REIT index fund or ETF, which holds dozens or hundreds of REITs across different property types and regions. This approach reduces the risk that any single REIT underperforms and requires less research than picking individual REITs. A broad REIT index fund typically charges lower fees than actively managed REIT funds.

Frequently Asked Questions

Can I lose money investing in a REIT?

Yes. REIT share prices fall when real estate values decline, when interest rates rise, or when the company's income drops. You can also lose money if you sell shares during a market downturn. However, if you hold shares long-term and reinvest dividends, you may recover losses as the market recovers and the REIT grows.

Do I need a lot of money to start investing in REITs?

No. You can buy a single share of most REITs for $20 to $150, depending on the company. You can also buy REIT ETFs or mutual funds with as little as $100 to $1,000. The lower cost makes it possible to diversify across multiple REITs without a large upfront investment.

Are REITs safer than owning rental property directly?

They are different, not necessarily safer. REITs are more liquid — you can sell shares in minutes — and require no maintenance or tenant management. But REIT shares are volatile and depend on company management. Owning rental property directly gives you control but requires capital, time, and carries landlord liability. Each approach has trade-offs.

What happens to my REIT dividends if the company loses money?

A REIT can still pay dividends even if it loses money in a given year, by using cash reserves or selling assets. However, if losses persist, the REIT may cut its dividend to preserve cash. Dividend cuts typically cause share prices to fall sharply, so monitor your REIT's financial reports and dividend history.

Should I hold REITs in a retirement account or a regular brokerage account?

Retirement accounts are usually better because REIT dividends are taxed as ordinary income, not capital gains. In a traditional IRA or 401(k), you avoid that tax until you withdraw money in retirement. In a Roth IRA, REIT dividends grow tax-free. In a regular taxable account, you pay tax on dividends every year, which reduces your after-tax returns.