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. Instead of buying a building yourself, you buy a small piece of many buildings by purchasing shares in a REIT. The REIT owns apartment complexes, office buildings, shopping centers, warehouses, or other properties. The money those properties generate through rent and leases flows back to you as a shareholder.

REITs trade on stock exchanges — you buy and sell them through a brokerage account the same way you would buy Apple or Microsoft stock. You don't own the physical property. You own a fractional stake in the company that does, which means you get income from the properties without the work of being a landlord.

The federal government created the REIT structure in 1960 to let regular people invest in large real estate portfolios that would otherwise require millions of dollars to buy outright. Today, REITs manage hundreds of billions of dollars in property across the United States.

Key Takeaways

  • REITs are companies that own income-producing real estate, and you buy shares in them through a brokerage account like any other stock.
  • Most REITs must distribute at least 90 percent of their taxable income to shareholders as dividends, which is where your return comes from.
  • REITs come in different types — some focus on apartments, others on offices, warehouses, or healthcare facilities — so you can choose what kind of real estate exposure you want.
  • REIT shares are liquid, meaning you can sell them quickly, unlike owning a rental property which takes months to sell.
  • REIT dividends are taxed as ordinary income, not at the lower capital gains rate, which affects your tax bill compared to other investments.

How REITs generate income and pay you

A REIT makes money the same way any landlord does: tenants pay rent, and the REIT collects it. The difference is scale. A REIT might own 50 apartment buildings across five states. When 10,000 tenants pay rent each month, that's millions of dollars flowing in.

By law, a REIT must distribute at least 90 percent of its taxable income to shareholders as dividends. That's where your money comes from. If a REIT owns $10 billion in properties generating $500 million in annual rent, and you own 0.001 percent of the REIT, you receive your proportional share of that dividend.

The dividend payment arrives in your brokerage account, usually quarterly. You can reinvest it to buy more shares, or take it as cash. The amount varies depending on how much rent the properties collected and how much the REIT spent on maintenance, property taxes, and debt service.

Different types of REITs and what they own

REITs specialize in different property types, so you can choose where your money goes. An apartment REIT owns residential complexes. An office REIT owns commercial office buildings. A retail REIT owns shopping centers and malls. A industrial REIT owns warehouses and distribution centers. A healthcare REIT owns hospitals, nursing homes, and medical office buildings.

Some REITs are diversified, meaning they own multiple property types. Others focus narrowly on a single sector. A data center REIT owns server facilities. A self-storage REIT owns storage units. A cell tower REIT owns the towers that hold antennas.

The property type matters because different sectors perform differently depending on the economy. During a recession, office REITs may struggle as companies reduce space. Apartment REITs may hold up better because people still need housing. A diversified REIT spreads risk across multiple property types.

Why people invest in REITs instead of buying rental property

Buying a rental house requires a down payment, a mortgage, and years of dealing with tenants, repairs, and property management. A REIT gives you real estate exposure without any of that. You don't fix a leaky roof. You don't evict anyone. You don't manage contractors.

REITs are also liquid. If you need your money, you sell your shares and have cash in your account in two business days. Selling a rental property takes three to six months and costs thousands in realtor fees and closing costs.

REITs also let you diversify across geographies and property types with a small amount of money. Buying five different rental properties in five different states would cost hundreds of thousands of dollars. Buying shares in five different REITs costs a few thousand.

The trade-off is that you don't control the property or the decisions the REIT makes. You don't get the tax deductions that come with owning rental property. And REIT dividends are taxed as ordinary income, not at the lower capital gains rate.

How REIT share prices move and what affects them

REIT share prices fluctuate based on supply and demand, just like any stock. If investors think a REIT will grow, they buy shares and the price goes up. If they think it will struggle, they sell and the price goes down.

Several factors move REIT prices. Interest rates matter because REITs borrow money to buy properties. When the Federal Reserve raises rates, borrowing costs more, which cuts into profits. When rates fall, REITs can borrow cheaper and profits rise. Occupancy rates matter — if an apartment REIT's buildings are 95 percent full, rents are strong. If occupancy drops to 80 percent, income falls. Economic conditions matter — a strong economy means businesses expand and pay higher rents. A recession means tenants leave and rents fall.

REIT share prices can also move independently of the underlying properties. During a stock market panic, investors sell everything including REIT shares, even if the properties themselves are performing well. Over time, REIT prices tend to track the actual performance of the properties they own, but in the short term, stock market sentiment drives the price.

Tax treatment of REIT dividends and capital gains

REIT dividends are taxed as ordinary income, the same rate as your salary. This is different from stock dividends, which often may have access to for lower capital gains tax rates. If you're in the 24 percent tax bracket and receive a $1,000 REIT dividend, you owe $240 in federal tax on it.

When you sell REIT shares for a profit, that gain is taxed as a capital gain. If you held the shares for more than one year, it's a long-term capital gain and gets the lower rate. If you held them for less than a year, it's a short-term capital gain taxed as ordinary income.

REITs held in a tax-deferred account like an IRA or 401(k) avoid this tax problem. The dividends compound tax-free until you withdraw the money in retirement. This is one reason financial advisors often recommend holding REITs in retirement accounts rather than taxable brokerage accounts.

Public REITs versus private REITs

Public REITs trade on stock exchanges and you can buy them through any brokerage. They're regulated by the Securities and Exchange Commission, their financials are public, and you can sell your shares anytime the market is open. Most REIT investors buy public REITs.

Private REITs don't trade on exchanges. You buy them through a financial advisor or directly from the REIT company. They're less regulated, their financials are not public, and you can't sell your shares easily. Private REITs often require a large minimum investment and lock your money up for years. They appeal to wealthy investors seeking tax benefits or specific property exposure, but they carry more risk because you have less information and less ability to exit.

Frequently Asked Questions

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

No. REIT shares trade like stocks, so you can buy one share for $50 to $150 depending on the REIT. Many brokerages let you buy fractional shares, so you can invest any amount. You don't need thousands of dollars to start.

Can I lose money investing in a REIT?

Yes. REIT share prices go up and down. If you buy a share for $100 and it drops to $80, you've lost $20. If the REIT cuts its dividend because properties aren't renting well, the share price usually falls. REITs are not risk-free, though they're generally less volatile than individual stocks.

What's the difference between a REIT and a real estate mutual fund?

A REIT is a company that owns and operates real estate. A real estate mutual fund is a basket of stocks, which may include REIT stocks, real estate company stocks, and construction company stocks. A mutual fund gives you broader exposure but less direct connection to actual property ownership.

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

Retirement accounts are usually better because REIT dividends are taxed as ordinary income. In an IRA or 401(k), those dividends compound tax-free. In a regular brokerage account, you pay tax on the dividend every year, which reduces your returns over time.

How often do REITs pay dividends?

Most REITs pay quarterly dividends, though some pay monthly or annually. Check the REIT's investor relations page to see the payment schedule. The dividend amount can change each quarter depending on how much income the properties generated.