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 pools money from investors to buy, manage, and sell properties — apartment buildings, office towers, shopping centres, warehouses, hotels, or medical facilities. Instead of owning property directly, you own a share of the REIT itself. The REIT collects rent from tenants, pays operating costs and property taxes, and distributes most of its profit to shareholders as dividends. You trade REIT shares on stock exchanges the same way you would trade any other stock.

The structure exists because of a federal rule: if a REIT distributes at least 90 percent of its taxable income to shareholders each year, it pays no corporate income tax. That tax break is why REITs can offer higher dividend yields than many other investments. The trade-off is that you, as a shareholder, pay income tax on those dividends.

Key Takeaways

  • A REIT is a company that owns real estate and sells shares to investors, similar to how a stock works.
  • REITs must distribute at least 90 percent of taxable income to shareholders, which is why they often pay higher dividends than stocks.
  • You can buy REIT shares through a brokerage account, and they trade during regular stock market hours.
  • Different REITs focus on different property types — residential, commercial, industrial, or healthcare — so returns and risk vary by sector.
  • REIT dividends are taxed as ordinary income, not capital gains, which affects how much you keep after taxes.

How REITs generate income and pay shareholders

A REIT makes money from rent paid by tenants. A residential REIT might own apartment complexes; a commercial REIT might own office buildings or retail space. The REIT collects rent, deducts property taxes, insurance, maintenance, and staff salaries, then distributes the remainder to shareholders as dividends.

The dividend payment is not optional. Federal law requires REITs to pay out at least 90 percent of taxable income. Most REITs pay quarterly dividends, though some pay monthly. The amount per share fluctuates based on how much profit the REIT generated that quarter and how many shares are outstanding.

A REIT can also make money by selling properties at a profit, though that is not its primary business. When a REIT sells a property for more than it paid, that gain is passed through to shareholders and is taxable to you.

Types of REITs and what they own

REITs specialise by property type, and each sector has different risk and return characteristics. Residential REITs own apartment buildings and single-family rental homes. Commercial REITs own office buildings, shopping centres, and retail space. Industrial REITs own warehouses and logistics facilities. Healthcare REITs own hospitals, medical office buildings, and senior living facilities. Specialty REITs own data centres, cell towers, self-storage units, or other niche properties.

The type of property matters because different sectors respond differently to economic conditions. During a recession, office and retail REITs may suffer as businesses close or downsize. Residential and healthcare REITs tend to be more stable because people always need housing and medical care. Industrial REITs have boomed in recent years because of e-commerce growth and warehouse demand.

How to buy REIT shares and what it costs

You buy REIT shares through a brokerage account — the same account you would use to buy any stock. You can open an account with a major broker like Fidelity, Charles Schwab, or Vanguard, or with a discount broker. There is no minimum investment beyond what the broker requires, though some REITs have minimum share purchases.

When you buy a REIT share, you pay the market price, which changes throughout the trading day. You also pay a commission or trading fee, though many brokers now offer commission-free stock trades. Some brokers allow you to buy fractional shares, so you do not have to buy a whole share at once.

You can also own REITs indirectly through a mutual fund or exchange-traded fund (ETF) that holds multiple REITs. This spreads your risk across different property types and REIT companies.

Tax treatment of REIT dividends and capital gains

REIT dividends are taxed as ordinary income, not as may have access to dividends. That means they are taxed at your regular income tax rate, which is usually higher than the capital gains rate. If you earn $50,000 per year and receive $2,000 in REIT dividends, you pay tax on $52,000 of income.

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

Because of the tax treatment, REITs are often held in tax-advantaged accounts like IRAs or 401(k)s, where dividends and gains are not taxed until you withdraw the money.

Risks and volatility in REIT investing

REIT share prices move up and down based on market conditions, interest rates, and the REIT's financial performance. When interest rates rise, REIT prices often fall because investors can earn higher returns from bonds and savings accounts. When interest rates fall, REIT prices often rise.

Individual REITs also face sector-specific risks. A commercial REIT that owns office space faces headwinds from remote work trends. A retail REIT faces competition from e-commerce. A residential REIT faces risk if local rental markets weaken. Economic recessions can reduce tenant demand and ability to pay rent.

REITs are also leveraged — they borrow money to buy properties. If a REIT takes on too much debt and property values or rents fall, the REIT may struggle to pay its obligations or may cut its dividend.

The difference between public and private REITs

A public REIT trades on a stock exchange and is regulated by the Securities and Exchange Commission (SEC). You can buy and sell shares anytime during market hours, and the price is transparent. Public REITs must file regular financial reports and meet disclosure requirements.

A private REIT is not traded on an exchange and is sold directly to investors, often through financial advisors. Private REITs are less regulated, less transparent, and less liquid — you cannot sell your shares quickly. They often have higher minimum investments and charge higher fees. Private REITs are generally only suitable for experienced investors with substantial capital.

Frequently Asked Questions

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

No. You can buy a single share of a public REIT for the market price of that share, which might be $50 to $150. Some brokers allow fractional shares, so you can invest any amount. Private REITs typically require $25,000 to $100,000 or more.

Can I lose money in a REIT?

Yes. REIT share prices fall when interest rates rise, when the economy weakens, or when the REIT's properties lose value or tenants. You can also lose money if you sell shares for less than you paid. Dividends are not may provide and can be cut if the REIT's income falls.

Are REITs safer than owning rental property directly?

They are different risks. With a REIT, you own shares that trade daily and are subject to market volatility. With direct property ownership, you control the property but face tenant problems, maintenance costs, and illiquidity. REITs offer diversification and lower capital requirements; direct ownership offers control and leverage.

What happens if a REIT cuts its dividend?

The share price usually falls because investors bought the REIT partly for the dividend income. A dividend cut signals that the REIT's income has declined, which may mean property values or rents are falling. You still own your shares, but your income from them decreases.

Can I hold REITs in a retirement account?

Yes. REITs can be held in an IRA, 401(k), or other tax-advantaged account. This is actually a common strategy because REIT dividends are taxed as ordinary income, so holding them in a tax-deferred account avoids that tax burden until you withdraw money.