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

A Real Estate Investment Trust (REIT) is a corporation that buys, owns, or finances income-producing property — apartment buildings, office towers, shopping centers, warehouses, hotels, or medical facilities. Instead of keeping the profits, a REIT must distribute at least 90 percent of its taxable income to shareholders each year as dividends. This structure lets ordinary people own a piece of real estate without buying a building themselves.

REITs trade on stock exchanges like regular companies, so you can buy and sell shares through a brokerage account. The price moves based on what investors think the properties are worth and how much income they generate. Some REITs own the buildings outright; others lend money to real estate developers and collect interest payments instead.

The REIT structure exists because of federal law. Congress created it in 1960 to let smaller investors access real estate markets that normally require millions of dollars upfront. A company must meet specific requirements — owning real property, having a certain number of shareholders, distributing that 90 percent of income — to call itself a REIT and get the tax treatment that makes the dividend payouts work.

Key Takeaways

  • REITs own or finance real estate and must pay out 90 percent of taxable income to shareholders as dividends each year.
  • You can buy REIT shares through a brokerage account the same way you buy stock, and the price changes based on market demand and property performance.
  • Different REITs focus on different property types — residential, commercial, industrial, healthcare — so returns and risks vary by sector.
  • REIT dividends are taxed as ordinary income, not capital gains, which affects how much you keep after taxes.

The three main types of REITs and what they own

Equity REITs own the buildings themselves. They collect rent from tenants, pay operating costs and property taxes, and pass the remainder to shareholders. An equity REIT might own 50 apartment complexes across five states, or a portfolio of office buildings in major cities. The value of your shares rises or falls with the real estate market and the REIT's ability to keep buildings occupied and rents competitive.

Mortgage REITs lend money to real estate developers and property owners instead of owning buildings. They earn income from the interest payments on those loans. Mortgage REITs are riskier because if a borrower defaults, the REIT may lose money. Their returns depend on interest rates and the creditworthiness of the borrowers they fund.

Hybrid REITs do both — they own some properties and finance others. This approach spreads risk across two income streams, though it also means returns are less predictable than a pure equity or mortgage REIT.

Within equity REITs, specialization matters. A residential REIT owns apartments; an industrial REIT owns warehouses and distribution centers; a retail REIT owns shopping centers; a healthcare REIT owns medical offices and senior housing. Each sector responds differently to economic conditions. Warehouses boomed during the pandemic; retail struggled. Healthcare REITs benefit from an aging population.

How REIT dividends work and what you actually receive

When you own REIT shares, you receive quarterly dividend payments. The amount depends on how much income the REIT generated that quarter and how many shares you own. A REIT might pay $0.50 per share per quarter, or $2.00 per year. If you own 100 shares, you receive $200 annually in four payments.

REIT dividends are taxed as ordinary income, not as capital gains. This matters for your tax bill. If you earn $2,000 in REIT dividends and you are in the 24 percent tax bracket, you owe $480 in federal tax on those dividends. By contrast, long-term capital gains (profit from selling a stock you held over a year) are taxed at lower rates — 0, 15, or 20 percent depending on your income. This tax treatment makes REITs less attractive in taxable accounts but more attractive in retirement accounts like IRAs, where dividends are not taxed annually.

The dividend amount is not may provide. If a REIT's properties fall vacant, if interest rates rise and mortgage REITs face losses, or if the real estate market weakens, the REIT may cut its dividend. Conversely, if a REIT acquires new properties or raises rents, the dividend can grow.

The difference between owning REIT shares and owning property directly

Buying REIT shares requires no down payment, no mortgage, no property management, and no maintenance costs. You can start with $100 and own a fraction of a building. You can sell your shares in minutes during market hours. You do not deal with tenants, repairs, or evictions.

Owning property directly gives you control. You choose the property, set the rent, decide when to sell, and keep all the profit after expenses. You can use leverage — borrowing money to buy more property than you could afford outright — and amplify your returns. You also get tax deductions for mortgage interest, property taxes, repairs, and depreciation, which REITs cannot pass through to shareholders.

REIT shares are also more liquid. If you need cash, you sell shares and have the money in a few days. Selling a building takes months and involves real estate agents, inspections, and closing costs. REITs also diversify automatically — one REIT might own 30 properties across multiple states and property types, spreading risk in a way that would cost a small investor hundreds of thousands of dollars to replicate.

Risks that affect REIT share prices and dividends

Interest rate changes hit REITs hard. When the Federal Reserve raises rates, borrowing becomes more expensive. REITs that finance with debt see their costs rise, squeezing profits. At the same time, higher rates make bonds and savings accounts more attractive to investors, so they sell REIT shares to chase better returns elsewhere. Both forces push REIT prices down.

Vacancy risk is real. If an office building loses major tenants and sits half-empty for a year, the REIT's income drops sharply. Economic recessions, remote work trends, or neighborhood decline can all drive vacancies. A healthcare REIT faces different risks — regulatory changes, Medicare payment cuts, or competition from new facilities.

Leverage amplifies losses. Many REITs borrow money to buy more properties. This boosts returns when things go well, but it also means a small drop in property values or rental income can wipe out shareholder equity quickly. A REIT with high debt is riskier than one with low debt.

Management quality matters. A REIT run by experienced operators who pick good locations, maintain properties well, and keep tenants happy will outperform one run by inexperienced or careless management. You cannot see this directly in the financial statements, which is why researching a REIT's track record before buying is important.

How to research a REIT before investing

Start with the REIT's annual report and quarterly earnings statements, which are filed with the Securities and Exchange Commission and available free on the SEC website or the REIT's investor relations page. Look for the funds from operations (FFO), which is the REIT's net income plus depreciation. FFO is a better measure of REIT health than traditional earnings because depreciation is an accounting fiction — buildings do not actually lose value at a fixed rate each year.

Check the dividend payout ratio — the percentage of FFO paid out as dividends. A ratio above 100 percent means the REIT is paying more than it earns, which is unsustainable. A ratio between 60 and 80 percent suggests the REIT has room to grow dividends or weather a downturn.

Look at occupancy rates. A residential REIT should have occupancy above 95 percent; an office REIT above 85 percent. Low occupancy signals trouble. Also check debt levels — the debt-to-total-assets ratio tells you how much the REIT borrowed. Higher leverage means higher risk.

Compare the REIT's dividend yield to other REITs in the same sector and to bond yields. If a REIT's yield is much higher than competitors, ask why — it might be a bargain, or the market might be pricing in risk that the dividend will be cut. Read analyst reports and earnings call transcripts to understand management's strategy and challenges.

Tax considerations for REIT investments

In a taxable brokerage account, REIT dividends are taxed as ordinary income every year, even if you do not sell your shares. This creates a tax drag that does not exist with stocks that pay no dividend or with bonds held in taxable accounts. If you are in a high tax bracket, this matters.

In a tax-deferred account like a traditional IRA or 401(k), REIT dividends are not taxed annually. You pay tax only when you withdraw money in retirement. This makes REITs much more tax-efficient in retirement accounts. If you have a choice between holding REITs or stocks in an IRA, REITs are often the better choice because the tax advantage is larger.

When you sell REIT shares for a profit, you owe capital gains tax on the gain. If you held the shares over a year, it is a long-term capital gain, taxed at the lower rate. If you held them under a year, it is a short-term gain, taxed as ordinary income.

Some REIT dividends may may have access to for the 20 percent may have access to business income deduction if you meet certain income thresholds, but this is complex and depends on your tax situation. Consult a tax professional if you own significant REIT holdings.

Frequently Asked Questions

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

No. You can buy a single share of most REITs through a brokerage account for under $100. Many brokerages also offer fractional shares, so you can invest any amount. This makes REITs accessible to small investors in a way that buying actual property is not.

Can I lose money investing in REITs?

Yes. REIT share prices fall when interest rates rise, when the real estate market weakens, or when a specific REIT faces problems like high vacancy or management failures. You can also lose money if you buy a REIT share at a high price and it falls. Dividends are not may provide and can be cut.

Are REITs a good hedge against inflation?

Historically, real estate has kept pace with inflation because landlords can raise rents as prices rise. However, REITs are not a perfect inflation hedge because rising rates often accompany inflation, and higher rates hurt REIT valuations. The relationship is complex and depends on the type of REIT and the economic environment.

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

A REIT is a company that owns or finances real estate and must distribute 90 percent of income to shareholders. A real estate mutual fund is a pool of money that buys REIT shares, stocks of real estate companies, or both. The mutual fund manager decides what to buy and sell. You own shares in the fund, not in the REITs directly.

Can I buy REITs through my 401(k) or IRA?

Yes. Most 401(k) plans and IRAs allow you to buy REIT shares through a brokerage window or as part of a target-date fund. Holding REITs in a retirement account is often smarter than holding them in a taxable account because the tax advantage is larger.