A REIT is a company that owns or finances real estate and pays most of its income to shareholders

REIT stands for Real Estate Investment Trust. It is a company that buys, owns, or finances buildings and land — often apartment complexes, office buildings, shopping centers, or warehouses. By law, a REIT must pay out at least 90 percent of its taxable income to shareholders each year as dividends. That requirement is what makes a REIT different from a regular real estate company.

REITs are traded on stock exchanges like the New York Stock Exchange, which means you can buy shares the same way you buy stock in any other company. You do not need to own an entire building or have a real estate license. You can own a small piece of a REIT that owns hundreds of properties across multiple states.

Most REITs focus on one type of property. Some own only apartment buildings. Others own only office space, shopping malls, storage facilities, or data centers. A few own a mix of property types. The type of property a REIT owns directly affects how much money it makes and how stable that income is.

Key Takeaways

  • A REIT is a company that owns real estate and must distribute 90 percent of its income to shareholders each year.
  • You can buy REIT shares through a brokerage account the same way you buy any stock, without needing to own property yourself.
  • Residential REITs own apartment buildings; commercial REITs own office or retail space; industrial REITs own warehouses or data centers.
  • REIT dividends are taxed as ordinary income, not capital gains, which affects how much you keep after taxes.
  • REITs can be a way to invest in real estate without the work of being a landlord, but they carry stock market risk.

How REITs make money and pay you

A REIT generates revenue from rent paid by tenants. It also collects fees from property management, parking, storage, or other services. Some REITs lend money to real estate developers and collect interest instead of owning the property outright.

After paying operating costs — maintenance, property taxes, insurance, staff salaries, and debt service — the REIT must distribute at least 90 percent of what remains to shareholders. This payout is called a dividend. If a REIT owns 500 apartment buildings and collects $100 million in rent, and operating costs are $60 million, the REIT has $40 million left. It must pay out at least $36 million to shareholders and can keep $4 million for reinvestment or reserves.

The amount you receive depends on how many shares you own and how much the REIT earns that year. A REIT that owns stable, fully occupied properties in strong markets tends to pay steadier dividends. A REIT that owns properties in declining areas or is still acquiring new buildings may pay less or reinvest more.

The difference between residential, commercial, and industrial REITs

Residential REITs own apartment complexes, single-family rental homes, or manufactured housing communities. Their income depends on occupancy rates and rent levels in their markets. A residential REIT that owns 50,000 apartments across 30 states has more diversification than one that owns 10,000 apartments in three states. Residential REITs are sensitive to economic downturns because people cut housing costs first when money is tight.

Commercial REITs own office buildings, shopping centers, and hotels. Office REITs have faced pressure since the pandemic because many companies shifted to remote work and reduced their office footprint. Retail REITs own shopping malls and strip centers; their success depends on whether tenants can pay rent, which varies by the type of retail. Hotel REITs depend on travel and tourism, which fluctuates with the economy.

Industrial REITs own warehouses, distribution centers, and data centers. Warehouse REITs have performed well because e-commerce growth has driven demand for logistics space. Data center REITs benefit from cloud computing and artificial intelligence, which require more server capacity. Industrial properties tend to have longer tenant leases and more stable income than residential or retail.

How to buy REIT shares and what to expect

You buy REIT shares through a brokerage account — the same account you would use to buy stock in Apple or Microsoft. You need a Social Security number, proof of identity, and an initial deposit (usually $0 to $500, depending on the broker). You can buy shares of individual REITs or buy a mutual fund or exchange-traded fund (ETF) that holds many REITs.

The price of a REIT share moves up and down based on what investors are willing to pay, just like any stock. If a REIT announces strong earnings, the share price may rise. If interest rates go up, REIT share prices often fall because investors can get better returns from bonds. If a REIT's major tenant goes bankrupt, the share price may drop.

You can sell your shares whenever the market is open. You do not have to hold them for a set time. However, if you sell at a loss, you cannot deduct that loss from your taxes unless you meet specific rules. If you sell at a gain, you owe capital gains tax on the profit.

Tax treatment of REIT dividends

REIT dividends are taxed as ordinary income, not as capital gains. This is a key difference from stock dividends. If you receive $1,000 in dividends from a regular company stock, that may be taxed at the lower capital gains rate (0, 15, or 20 percent, depending on your income). If you receive $1,000 in REIT dividends, it is taxed at your regular income tax rate (10, 12, 22, 24, 32, 35, or 37 percent).

This means REIT dividends are less tax-efficient than stock dividends. A REIT that pays a 4 percent dividend may feel like less money in your pocket after taxes than a stock that pays a 3 percent dividend. Some investors hold REITs in retirement accounts (like an IRA or 401k) to avoid this tax hit.

You also owe tax on any gain when you sell REIT shares. If you bought shares at $50 and sold them at $60, you owe capital gains tax on the $10 profit. This is separate from the dividend tax.

Risks of investing in REITs

REIT shares are subject to stock market risk. The price can fall sharply if investors lose confidence in real estate, if interest rates rise, or if the economy enters a recession. During the 2008 financial crisis, many REIT share prices fell 50 percent or more. During the COVID-19 pandemic, hotel and office REITs fell sharply while residential and industrial REITs held up better.

REITs also carry property-specific risk. If a REIT's major tenant leaves or goes bankrupt, the REIT loses that income. If a REIT owns properties in a region hit by economic decline, job loss, or natural disaster, its properties may lose value and tenants may struggle to pay rent. A REIT that is heavily leveraged (borrows a lot of money) is more vulnerable to rising interest rates because its debt becomes more expensive to service.

Liquidity risk is lower for large REITs traded on major exchanges, but lower for smaller REITs. If you own shares of a small REIT and need to sell quickly, you may have to accept a lower price because fewer buyers are interested.

REITs versus owning rental property directly

Owning REIT shares and owning rental property directly are two different ways to invest in real estate. With a REIT, you own a small piece of many properties managed by professionals. You receive dividends but have no control over which properties the REIT buys or how they are managed. You cannot deduct mortgage interest or depreciation on your taxes because you do not own the property.

With direct ownership, you own one or a few properties outright or with a mortgage. You collect all the rent, but you also pay all the costs and do the work (or hire a property manager). You can deduct mortgage interest, property taxes, maintenance, and depreciation on your taxes, which can significantly reduce your taxable income. You have full control over the property and can sell it whenever you want.

REIT shares are more liquid — you can sell them in seconds during market hours. Rental property takes weeks or months to sell. REIT shares require less capital to start — you can buy one share for $20 to $100. A rental property requires a down payment of 20 to 25 percent, which is often $50,000 or more. REITs are easier if you want diversification; direct ownership is better if you want control and tax deductions.

Frequently Asked Questions

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

No. You can buy a single share of most REITs for $20 to $150, depending on the REIT. Some brokerages allow fractional share purchases, so you can invest even smaller amounts. You do need a brokerage account and an initial deposit, which varies by broker but is often $0 to $500.

Can I lose money investing in a REIT?

Yes. REIT share prices fall when investors lose confidence in real estate, when interest rates rise, or when the economy weakens. You can also lose money if a REIT cuts its dividend or goes bankrupt. However, diversified REITs with stable properties in strong markets tend to be less volatile than individual stocks.

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 holds shares of many REITs or real estate companies. A mutual fund gives you instant diversification across multiple REITs and property types. A single REIT gives you more focused exposure to one property type or market.

Do REITs pay dividends every month or every year?

Most REITs pay dividends quarterly (four times per year). Some pay monthly or semi-annually. The frequency depends on the REIT's policy. You can find the dividend payment schedule on the REIT's investor relations website or through your brokerage.

Can I hold a REIT in a retirement account like an IRA?

Yes. Holding REITs in an IRA or 401k is common because it shields you from the ordinary income tax on dividends. Inside a retirement account, the dividends are not taxed until you withdraw money in retirement. This makes REITs more tax-efficient in retirement accounts than in regular taxable accounts.