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

REIT stands for Real Estate Investment Trust. It is a company that owns, operates, or finances properties that generate income — apartment buildings, office towers, shopping centers, warehouses, hotels, or medical facilities. When you buy shares in a REIT, you own a piece of that company and a claim on the income those properties produce. REITs trade on stock exchanges just like regular company stocks, so you can buy and sell them through a brokerage account.

The key difference between a REIT and owning property directly is that you do not own the building itself. You own a share of the company that owns the building. That means you do not manage tenants, handle repairs, or deal with property taxes. The REIT's management team does that work. In return, REITs are required by law to distribute at least 90 percent of their taxable income to shareholders as dividends, which is why many people buy them for the regular payouts.

Key Takeaways

  • A REIT is a company that owns or finances real estate properties and distributes most of its income to shareholders as dividends.
  • You buy REIT shares through a brokerage account the same way you buy stock, and you can sell them whenever the market is open.
  • REITs must own properties that generate rental or lease income, and they must distribute at least 90 percent of taxable income to shareholders.
  • Different REITs focus on different property types — residential, commercial, industrial, healthcare — so the income and risk profile varies by REIT.

How REITs are structured and what they must own

A REIT is a legal structure created under federal tax law. To may have access to as a REIT, a company must meet specific requirements: it must own properties that produce income (rent, lease payments, or financing fees), it must be organized as a corporation or trust, it must have at least 100 shareholders, and no more than 50 percent of shares can be held by five or fewer people. The company must also distribute at least 90 percent of its taxable income to shareholders each year.

REITs come in different types based on what they own. An equity REIT owns the actual buildings and land and collects rent from tenants. A mortgage REIT lends money to real estate developers and owners and collects interest payments. Some REITs focus on a single property type — apartments, office space, industrial warehouses, shopping centers, or healthcare facilities — while others own a mix. The type of property matters because different sectors perform differently depending on the economy, interest rates, and tenant demand.

Why people invest in REITs and what returns look like

People buy REITs for two reasons: dividend income and potential price appreciation. Because REITs must distribute 90 percent of taxable income, they typically pay higher dividends than most stocks. If a REIT owns apartment buildings that collect $100 million in rent and has $10 million in expenses, it must distribute roughly $81 million (90 percent of the $90 million taxable income) to shareholders. That income gets divided among all shareholders based on how many shares they own.

The second return comes from the share price itself. If a REIT owns properties that increase in value, or if the company becomes more profitable, the share price may rise. You can then sell your shares for more than you paid. However, REIT share prices also fall if property values drop, if interest rates rise (which makes borrowing more expensive), or if tenants stop paying rent. The total return — dividends plus price change — varies widely depending on the REIT, the properties it owns, and broader economic conditions.

The tax treatment of REIT dividends

REIT dividends are taxed differently than dividends from regular stocks. Most REIT dividends are taxed as ordinary income at your regular tax rate, not at the lower capital gains rate. This means if you earn $5,000 in REIT dividends and your tax bracket is 24 percent, you owe roughly $1,200 in federal tax on those dividends. By contrast, may have access to dividends from regular stocks are often taxed at 15 or 20 percent.

Some REIT dividends may be taxed as capital gains or return of capital, which have different tax treatment, but most are ordinary income. This is one reason many people hold REITs in retirement accounts like IRAs or 401(k)s, where dividends are not taxed until you withdraw the money. If you hold REITs in a regular taxable account, you will owe taxes on the dividends each year, even if you reinvest them.

How to buy REIT shares and what costs are involved

You buy REIT shares through a brokerage account — the same account you would use to buy any stock. Open an account with a broker (online brokers like Fidelity, Charles Schwab, or Vanguard are common), deposit money, and search for the REIT by its ticker symbol. Place an order to buy a certain number of shares at the market price. The transaction usually settles within two business days, and the shares appear in your account.

Costs include the brokerage commission (many brokers charge zero commission for stock trades now), the bid-ask spread (the difference between what buyers will pay and what sellers are asking), and any fees your broker charges for account maintenance. Some people also buy REITs through mutual funds or exchange-traded funds (ETFs) that hold multiple REITs, which spreads the risk across many properties and companies but adds a fund management fee. There is no government fee or special cost to buy a REIT — it is just like buying any other stock.

Risks specific to REIT investing

REITs are not risk-free. Interest rate risk is significant: when the Federal Reserve raises interest rates, borrowing becomes more expensive, which reduces REIT profits and often causes share prices to fall. Property-specific risk means if a REIT owns office buildings and office space becomes less desirable, those properties generate less income. Tenant risk means if major tenants leave or stop paying rent, the REIT's income drops. Economic downturns can reduce both property values and rental income.

Liquidity risk is usually low because most REITs trade on major exchanges, but smaller or specialized REITs may be harder to sell quickly. Leverage risk applies to REITs that borrow heavily to buy properties — if property values fall and the REIT cannot pay its debt, shareholders lose value. Dividend cuts are also possible: if a REIT's income falls, it may reduce or suspend dividends to preserve cash. Unlike owning a single property directly, you have no control over management decisions or which properties the REIT buys or sells.

REITs versus owning rental property directly

Buying REIT shares and owning rental property are both real estate investments, but they work very differently. With a REIT, you own shares in a company; with rental property, you own the building. A REIT requires no management work — you do not find tenants, collect rent, or fix the roof. Rental property requires active management or hiring a property manager, which costs money and time. REITs are liquid: you can sell shares in minutes during market hours. Rental property can take months to sell.

REITs require less capital to start — you can buy one share for $50 to $200 depending on the REIT. Rental property requires a down payment (often 20 to 25 percent of the purchase price) plus closing costs, so you need tens of thousands of dollars. REITs offer diversification across many properties and locations in a single purchase. Rental property ties your money to one building in one market. However, rental property owners can deduct mortgage interest, property taxes, repairs, and depreciation, which reduces taxable income. REIT shareholders cannot claim these deductions.

Frequently Asked Questions

Can I lose money investing in a REIT?

Yes. REIT share prices rise and fall based on property values, interest rates, tenant demand, and company performance. If you buy shares at $50 and the price falls to $35, you have lost $15 per share. You can also lose money if the REIT cuts or eliminates its dividend. However, if you hold the shares long enough and the underlying properties appreciate, you may recover losses.

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

No. You can buy a single share of most REITs for $50 to $300, depending on the REIT. You only need a brokerage account and enough money to buy at least one share. Many people start with small amounts and add more over time. Some brokers also offer fractional shares, so you can invest even smaller amounts.

What is the difference between a public REIT and a private REIT?

A public REIT trades on a stock exchange and is regulated by the SEC. You can buy and sell shares anytime the market is open. A private REIT is not traded publicly and is usually sold through brokers or financial advisors. Private REITs are less liquid, have higher minimum investments, and are less transparent, but some investors use them for diversification.

Do all REITs pay dividends?

Yes, all REITs must distribute at least 90 percent of taxable income to shareholders, so all REITs pay dividends. However, the dividend amount varies. Some REITs pay 3 to 4 percent per year; others pay 6 to 8 percent or more. Higher dividend yields can signal higher risk or that the market expects slower growth.

Can I hold a REIT in a retirement account?

Yes. You can hold REIT shares in an IRA, 401(k), or other retirement account. This is often a good strategy because REIT dividends are taxed as ordinary income, and holding them in a tax-deferred account avoids annual tax bills. Check with your account provider to confirm they allow REIT purchases.