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

A Real Estate Investment Trust (REIT) is a corporation that owns, operates, or finances properties that generate income — apartment buildings, office towers, shopping centers, warehouses, hospitals, data centers, or hotels. Instead of buying a building yourself, you buy shares of the REIT, and the company distributes most of its profits to shareholders as dividends. The REIT handles the management, maintenance, and tenant relationships; you receive a portion of the rental income and property appreciation.

REITs exist because federal law allows them to avoid corporate income tax if they meet specific rules. In exchange, they must own real property (not just mortgages), derive most income from real estate operations, and distribute at least 90 percent of taxable income to shareholders each year. This structure makes REITs a way for ordinary investors to own a piece of commercial or residential real estate without the capital, time, or expertise required to buy and manage property directly.

Key Takeaways

  • A REIT is a publicly traded or private company that owns real estate and pays out most of its profits as dividends to shareholders.
  • REITs can own residential apartments, office buildings, retail centers, industrial warehouses, healthcare facilities, or other property types, and most specialize in one category.
  • You buy REIT shares through a brokerage account the same way you buy stock, and you can sell them whenever the market is open.
  • REIT dividends are typically higher than stock dividends because the company must distribute 90 percent of taxable income, but they are taxed as ordinary income, not capital gains.
  • REITs are subject to market risk — share price fluctuates based on interest rates, property values, and investor demand — so you can lose money if you sell when the price is down.

The two main types: publicly traded and non-traded REITs

Publicly traded REITs are listed on stock exchanges (NASDAQ, NYSE) and trade during market hours like any other stock. You can buy and sell shares instantly through any brokerage account. These REITs must file financial reports with the Securities and Exchange Commission (SEC) and meet strict disclosure rules. Most REIT investors own publicly traded shares because they are liquid, transparent, and low-cost to enter.

Non-traded REITs are not listed on an exchange and do not trade publicly. They are sold through broker-dealers or financial advisors, often with high upfront fees (typically 10 to 15 percent of your investment). You cannot easily sell your shares — redemption is limited and may take months or years. Non-traded REITs appeal to investors seeking longer holding periods and potentially higher dividend yields, but they carry higher costs and less transparency than publicly traded alternatives.

A third, smaller category is private REITs, which are closed to new investors or open only to accredited investors (those with high net worth or income). These are rarely accessible to ordinary investors and are not discussed in detail here.

What types of property REITs own

REITs specialize by property type. An apartment REIT owns residential rental buildings. An office REIT owns commercial office space leased to corporations. A retail REIT owns shopping centers and malls. An industrial REIT owns warehouses and distribution centers, often leased to e-commerce companies. A healthcare REIT owns hospitals, medical offices, and senior living facilities. A data center REIT owns server facilities leased to tech companies. A hotel REIT owns lodging properties.

Most REITs focus on one property type because the management, tenant base, and market dynamics differ significantly. A REIT that owns apartments faces different risks and opportunities than one that owns warehouses. When you buy REIT shares, you are betting on the performance of that specific property category and the company's ability to keep tenants, maintain occupancy, and raise rents.

How REIT dividends work and how they are taxed

REITs must distribute at least 90 percent of taxable income to shareholders, usually as quarterly dividends. This is why REIT dividend yields are often higher than stock dividends — the company is required to pay out most of what it earns rather than reinvest it. If a REIT earns $100 million in taxable income, it must distribute at least $90 million to shareholders.

REIT dividends are taxed as ordinary income, not as capital gains. This means they are taxed at your regular income tax rate (up to 37 percent federally, depending on your bracket), not the lower long-term capital gains rate (15 or 20 percent). If you hold REIT shares in a tax-deferred account like an IRA or 401(k), you avoid this tax burden. In a regular brokerage account, the tax hit can be significant, especially if you are in a high tax bracket.

When you sell REIT shares, any profit is taxed as a capital gain (long-term if you held the shares over one year, short-term if under one year). The dividend income and the capital gain are taxed separately.

The risks of owning REIT shares

REIT share prices fluctuate based on interest rates, property values, tenant demand, and investor sentiment. When interest rates rise, REITs often fall in value because investors can earn higher returns in bonds, making REIT dividends less attractive by comparison. When commercial real estate values decline — due to recession, oversupply, or changing tenant needs — REIT share prices typically fall.

Specific property types carry specific risks. Apartment REITs are sensitive to housing demand and rent control laws. Retail REITs have suffered as e-commerce reduces foot traffic in shopping centers. Office REITs face uncertainty as remote work reduces demand for office space. Hotel REITs depend on travel and tourism, which can collapse during economic downturns or pandemics. Industrial and data center REITs have been more resilient in recent years.

If you need to sell your shares during a downturn, you may realize a loss. Unlike owning physical property, which you can hold indefinitely and wait for recovery, REIT shares are marked to market daily, and you see the loss in real time. Publicly traded REITs are liquid, so you can sell anytime, but that liquidity cuts both ways — you can exit quickly, but you also face the temptation to panic-sell during downturns.

How to buy REIT shares

To buy publicly traded REIT shares, you need a brokerage account (through firms like Fidelity, Vanguard, Charles Schwab, or others). Open the account, fund it with cash, and search for the REIT by its ticker symbol. Place a buy order during market hours, and the shares settle in your account within two business days. The process is identical to buying any stock.

You can also buy REITs through mutual funds or exchange-traded funds (ETFs) that hold a basket of REIT shares. This approach diversifies your REIT exposure across multiple companies and property types with a single purchase. REIT ETFs trade like stocks and often have lower expense ratios than actively managed REIT mutual funds.

Non-traded REITs are purchased through a financial advisor or broker-dealer, typically with a minimum investment of $1,000 to $25,000. The process is slower and involves more paperwork. You should understand the fees, redemption terms, and holding period before committing.

REITs versus owning property directly

Buying REIT shares requires far less capital than buying a building. You can start with a few hundred dollars; owning property typically requires a down payment of 20 to 25 percent of the purchase price, plus closing costs. REITs also eliminate the work of finding tenants, collecting rent, maintaining the building, and dealing with vacancies and repairs.

However, REITs offer less control and less tax benefit. When you own property directly, you can deduct mortgage interest, property taxes, depreciation, and operating expenses from your taxable income. REIT dividends receive no such deduction — you pay tax on the full dividend amount. If you own property with a mortgage, you benefit from leverage (borrowing to amplify returns); REIT investors do not directly control the company's leverage, though REITs do use debt to finance acquisitions.

REIT shares are also more volatile than physical property. Real estate values change slowly and are not marked to market daily; REIT share prices move with stock market sentiment and can swing 20 to 30 percent in a year. If you need stability and long-term wealth building, direct property ownership may suit you better. If you want diversification, liquidity, and low maintenance, REITs are a simpler entry point.

Frequently Asked Questions

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

No. Publicly traded REIT shares cost anywhere from $10 to $200 per share depending on the company, so you can start with a few hundred dollars. REIT ETFs and mutual funds allow you to own multiple REITs with a single purchase. Non-traded REITs typically require a minimum of $1,000 to $25,000.

Can I lose money investing in REITs?

Yes. REIT share prices fluctuate based on interest rates, property values, and market demand. If you sell when the price is down, you realize a loss. The dividend income does not protect you from share price declines. Over long periods, REITs have historically returned around 10 percent annually, but short-term losses are common.

Are REIT dividends better than stock dividends?

REIT dividends are usually higher in percentage terms because REITs must distribute 90 percent of taxable income. However, they are taxed as ordinary income, not capital gains, so the after-tax return may be lower than a stock dividend taxed at capital gains rates. The true comparison depends on your tax bracket and whether you hold the shares in a tax-deferred account.

What happens if a REIT's tenants stop paying rent?

If occupancy falls or tenants default, the REIT's income declines, which reduces dividends and often causes the share price to fall. REITs are exposed to tenant risk just as property owners are. During recessions or crises (like the COVID-19 pandemic), some REIT dividends were cut or suspended when tenants could not pay.

Can I hold REITs in a retirement account?

Yes. Holding REITs in an IRA, 401(k), or other tax-deferred account eliminates the ordinary income tax on dividends, which is a major advantage. This is one of the best ways to own REITs because you avoid the tax drag that makes them less attractive in regular brokerage accounts.