A REIT is a company that owns and operates income-producing real estate

A Real Estate Investment Trust (REIT) is a corporation that buys, owns, and manages properties — apartments, office buildings, shopping centers, warehouses, hotels — and distributes the income from those properties to people who own shares in the company. You own a piece of the REIT by buying its stock, just as you would buy stock in any other public company. The REIT collects rent from tenants, pays operating costs and debt, and passes most of the remaining profit to shareholders.

REITs exist because of a federal rule: if a company owns real estate, collects rent, and distributes at least 90 percent of its taxable income to shareholders each year, it does not pay corporate income tax. That structure makes real estate investment available to ordinary people without requiring them to buy a building outright or become a landlord themselves.

Key Takeaways

  • A REIT is a company that owns real estate and pays out most of its income to shareholders, who receive that money as dividends.
  • You buy REIT shares through a brokerage account the same way you buy any stock, and you can sell them whenever the market is open.
  • REITs must own real property and distribute 90 percent of taxable income to shareholders, which is why they often pay higher dividends than other stocks.
  • The value of your REIT shares rises and falls with the stock market and with the performance of the properties the REIT owns.
  • REITs are taxed differently than regular stocks — dividends are taxed as ordinary income, not as capital gains.

How a REIT makes money and pays you

A REIT generates revenue by collecting rent from tenants. A residential REIT might own apartment complexes; a retail REIT might own shopping centers; a healthcare REIT might own medical office buildings or nursing homes. The REIT subtracts operating expenses — property taxes, maintenance, insurance, property management salaries, debt payments — and the remainder is profit.

By law, the REIT must distribute at least 90 percent of that profit to shareholders. This distribution is called a dividend. If you own 100 shares of a REIT and the REIT declares a quarterly dividend of $0.50 per share, you receive $50. Most REITs pay dividends quarterly, though some pay monthly or annually. The dividend rate varies by REIT and changes as the properties perform better or worse.

You also make money if the REIT's stock price rises. If you buy shares at $50 and sell them at $60, you pocket the $10 difference. But REIT stock prices can also fall if the real estate market weakens, if interest rates rise, or if the REIT's properties fall vacant.

Types of REITs and what they own

REITs are organized by the type of property they own. A residential REIT owns apartments, single-family rentals, or manufactured housing communities. 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, medical offices, senior housing, or nursing homes.

Some REITs are diversified, meaning they own multiple property types. Others are specialized, owning only one type — for example, a REIT that owns only data centers or only cell phone towers. The type of property matters because different property types perform differently depending on economic conditions. During a recession, retail REITs often struggle because stores close; residential REITs may hold up better because people still need housing.

REITs can be publicly traded, meaning you buy and sell their shares on a stock exchange like the New York Stock Exchange, or non-traded, meaning shares are sold directly by the REIT and are harder to sell. Most individual investors encounter publicly traded REITs.

How to buy REIT shares

You buy REIT shares through a brokerage account — the same account you would use to buy any stock. Open an account with a broker (Fidelity, Vanguard, Charles Schwab, and others offer retail accounts), deposit money, search for the REIT by its ticker symbol, and place a buy order. The transaction settles in two business days, and the shares appear in your account.

You can also own REITs indirectly through a mutual fund or exchange-traded fund (ETF) that holds multiple REITs. A real estate mutual fund or ETF spreads your money across many properties and REITs, reducing risk if one REIT performs poorly. The trade-off is that you pay a fund fee (usually 0.2 to 1 percent annually) on top of any brokerage fees.

Selling REIT shares is equally straightforward: log into your brokerage account, place a sell order, and the money lands in your account two business days later. You can sell whenever the market is open, unlike non-traded REITs, which may have restrictions on when you can sell.

Tax treatment of REIT dividends and gains

REIT dividends are taxed as ordinary income, not as capital gains. This is a key difference from stock dividends, which often may have access to for lower capital gains tax rates. If you receive $1,000 in REIT dividends and you are in the 24 percent tax bracket, you owe $240 in federal income tax on those dividends. This applies whether you hold the REIT in a regular taxable account or a retirement account.

If you sell REIT shares for a profit, that profit is taxed as a capital gain. If you hold the shares for more than one year before selling, the gain is a long-term capital gain and may be taxed at a lower rate (0, 15, or 20 percent depending on your income). If you hold the shares for one year or less, the gain is a short-term capital gain and is taxed as ordinary income.

In a tax-advantaged retirement account like a 401(k) or IRA, REIT dividends and gains are not taxed until you withdraw money from the account. Many investors hold REITs in retirement accounts to defer the tax on dividends.

Risks of investing in REITs

REIT share prices fluctuate with the stock market. If the broader market declines, REIT stocks often decline too, even if the underlying properties are performing well. Interest rate changes also affect REITs: when interest rates rise, borrowing becomes more expensive for REITs, which reduces profit and can push stock prices down.

Property-specific risks matter as well. A retail REIT's value depends on whether retail stores remain profitable and whether tenants pay rent. A residential REIT's value depends on whether apartments stay occupied and whether rents can rise. Economic downturns, local job losses, or shifts in how people work (like remote work reducing office demand) can hurt specific property types.

Non-traded REITs carry additional risk: they are less liquid, meaning you may not be able to sell your shares quickly or at a fair price. They also typically charge higher fees and may have long lock-up periods before you can sell.

REITs versus owning rental property directly

Buying REIT shares requires far less capital than buying a rental property. You can start with a few hundred dollars; a rental property typically requires a down payment of 20 to 25 percent of the purchase price, plus closing costs. REITs also require no active management — you do not screen tenants, collect rent, or arrange repairs. A REIT's professional management team handles all of that.

The trade-off is that you have no control over which properties the REIT buys or how it manages them. You also cannot use leverage (borrowed money) to amplify returns the way you can with a rental property. And REIT dividends are taxed as ordinary income, while rental property owners can deduct mortgage interest, depreciation, and operating expenses, which can reduce their taxable income.

For most people, REITs offer a simpler, lower-barrier way to own real estate income. For people with capital, time, and expertise, direct property ownership may offer greater control and tax benefits.

Frequently Asked Questions

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

No. REIT shares trade like any stock, so you can buy a single share for the current stock price — often $20 to $100 per share. Many brokerages allow fractional share purchases, so you can invest any amount. A mutual fund or ETF holding multiple REITs may have a minimum investment of $1,000 to $3,000, depending on the fund.

Can I lose money investing in REITs?

Yes. REIT share prices can fall if the stock market declines, if interest rates rise, or if the properties the REIT owns perform poorly. You could sell at a loss. However, if you hold the shares long-term and collect dividends, the total return (dividends plus price appreciation) may offset short-term losses.

Are REITs safer than owning rental property?

REITs are more liquid — you can sell shares quickly — but they are subject to stock market volatility. Rental property is less liquid but may be more stable if you hold it long-term. Both carry risk. REITs spread risk across many properties; direct ownership concentrates risk in one property.

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

A REIT is a company that owns real estate. A real estate mutual fund is a fund that owns shares in multiple REITs or real estate companies. A mutual fund offers more diversification but charges a management fee. A REIT is a direct ownership stake in one company.

Do I have to hold REITs in a retirement account?

No, but many investors do because REIT dividends are taxed as ordinary income. Holding them in a 401(k) or IRA defers that tax. You can also hold REITs in a regular taxable brokerage account and pay tax on dividends each year.