A REIT is a company that owns income-producing real estate and distributes most of its profits to shareholders

A Real Estate Investment Trust (REIT) is a corporation that buys, manages, and sells properties — office buildings, apartments, warehouses, shopping centers, hotels — and passes the rental income and profits to people who own shares in it. You own a piece of the REIT; the REIT owns the real estate. When tenants pay rent, that money flows to the REIT, which must distribute at least 90 percent of its taxable income to shareholders as dividends.

The core idea is simple: you get real estate income without owning property yourself, without managing tenants, and without putting down a down payment. A REIT handles the property management, maintenance, and tenant disputes. You receive quarterly or annual dividend payments based on how many shares you own.

REITs trade on stock exchanges like regular companies — you buy and sell them through a brokerage account the same way you would buy Apple or Microsoft stock. This liquidity is the main difference from owning rental property directly. You can sell your shares in minutes; selling a building takes months.

Key Takeaways

  • REITs own and operate income-producing properties and must distribute 90 percent of taxable income to shareholders as dividends.
  • You buy REIT shares through a brokerage account like any stock, and you can sell them quickly without the delays of real estate transactions.
  • REITs come in different types — some focus on apartments, others on office space, warehouses, or healthcare facilities — so you can target specific property sectors.
  • REIT dividends are taxed as ordinary income, not capital gains, which means your tax bill may be higher than with other investments.
  • REITs are regulated by the SEC and must meet specific rules about property ownership, debt levels, and shareholder distribution to keep their REIT status.

The three main types of REITs and what they own

Equity REITs own the properties themselves. They collect rent from tenants, handle maintenance and repairs, and keep the difference as profit. Most REITs are equity REITs. Examples include apartment complexes, office parks, shopping malls, industrial warehouses, and data centers. When you own shares in an equity REIT, you own a fractional stake in those actual buildings and the income they generate.

Mortgage REITs do not own properties. Instead, they lend money to real estate developers and property owners, then collect interest payments. They act like banks for real estate. Mortgage REITs are riskier because if a borrower defaults, the REIT loses that income stream and may have to foreclose and sell the property at a loss.

Hybrid REITs do both — they own some properties and hold mortgages on others. They are less common than pure equity or mortgage REITs.

Within equity REITs, you will also see specialization by property type. A healthcare REIT might own medical office buildings and nursing facilities. An industrial REIT might focus on warehouses and logistics centers. A residential REIT might own apartment buildings and single-family rental homes. This specialization lets you target specific sectors if you believe certain property types will outperform others.

How REIT dividends work and what you actually receive

REITs must distribute at least 90 percent of their taxable income to shareholders. This is not optional — it is a legal requirement to maintain REIT status. That distribution usually comes as a quarterly or annual dividend paid directly to your brokerage account.

The dividend amount varies based on how much profit the REIT made that quarter or year. A REIT that owns high-occupancy apartment buildings in strong markets will generate more income and pay higher dividends than one struggling with vacancies. Some REITs raise their dividends year over year; others cut them if property values fall or vacancies rise.

The dividend yield — the annual dividend divided by the share price — tells you what return you are getting on your investment. A REIT trading at $50 per share that pays $3 in annual dividends has a 6 percent yield. This yield fluctuates as the share price moves. If the stock drops to $40, the same $3 dividend now represents a 7.5 percent yield.

One important catch: REIT dividends are taxed as ordinary income, not as capital gains. If you hold the shares in a taxable brokerage account, you will owe income tax on the full dividend amount at your regular tax rate, which is typically higher than the capital gains rate. Holding REITs in a tax-advantaged account like an IRA or 401(k) can reduce this tax burden.

The regulatory requirements that define a REIT

The IRS sets strict rules for what qualifies as a REIT. A company must own real property (not just manage it for someone else), derive at least 75 percent of its gross income from real estate sources like rent or mortgage interest, and keep at least 75 percent of its assets in real estate or cash. It must also have at least 100 shareholders and no single shareholder can own more than 50 percent of the shares.

The SEC regulates REITs as securities, so they must file regular financial reports and disclose material information to shareholders. This transparency is one reason REITs are generally considered lower-risk than buying property directly — you have access to audited financial statements and can see exactly what the REIT owns and how much debt it carries.

REITs also face limits on how much debt they can take on. Most maintain debt-to-asset ratios between 40 and 60 percent, though this varies by REIT and property type. A REIT with too much debt becomes risky; if property values fall or interest rates spike, the REIT may struggle to service its loans and cut dividends.

Comparing REITs to owning rental property directly

Owning a rental property means you handle everything: finding tenants, collecting rent, fixing the roof, dealing with evictions, and paying property taxes. You build equity as you pay down the mortgage, and you can deduct mortgage interest and maintenance costs from your taxes. But you need a large down payment, your money is illiquid (it takes months to sell), and you carry all the risk if the tenant stops paying or the market crashes.

A REIT requires no down payment and no property management. You can sell your shares in seconds. Your investment is diversified across many properties and often across multiple markets. But you do not build equity — you only receive dividends. You cannot deduct expenses the way a property owner can. And your dividends are taxed as ordinary income, not capital gains.

REITs also move with the stock market. If the broader market drops, REIT prices often fall even if the underlying properties are performing well. A rental property is not subject to daily price swings the same way.

The risks and downsides of REIT investing

REITs are not risk-free. Interest rate increases hurt REITs because higher rates make borrowing more expensive and can reduce property values. When the Federal Reserve raises rates, REIT share prices often fall. Conversely, falling rates tend to boost REITs.

Economic downturns reduce occupancy rates and rental income. During a recession, office buildings empty out, retail tenants close, and apartment residents move in with family. A REIT's dividend can drop sharply if its properties sit vacant.

Some REITs carry high debt loads. If a REIT borrowed heavily to buy properties at peak prices and then the market softens, the REIT may not generate enough income to cover its debt payments. This can force dividend cuts or even threaten the REIT's survival.

Sector-specific risks also matter. A healthcare REIT depends on the health of the medical industry and government reimbursement rates. A retail REIT faces pressure from e-commerce and changing shopping habits. An office REIT has struggled as remote work reduced demand for office space. Diversifying across multiple REIT types and sectors reduces this risk.

How to evaluate a REIT before investing

Start with the REIT's funds from operations (FFO), a metric specific to real estate. FFO is net income plus depreciation and amortization, minus gains on property sales. It shows how much cash the REIT actually generated from operations. Compare FFO per share to the dividend per share — if the REIT is paying out more than it earns, the dividend is not sustainable.

Check the occupancy rate. A REIT with 95 percent occupancy is healthier than one at 80 percent. Look at the types of tenants too — a REIT with one major tenant is riskier than one with hundreds of smaller tenants spread across many properties.

Review the debt-to-assets ratio and the interest coverage ratio (earnings divided by interest expense). A REIT with manageable debt and strong interest coverage can weather downturns better than a highly leveraged one.

Compare the dividend yield to other REITs and to broader market returns. A yield that looks too high may signal that the market doubts the REIT's ability to sustain it. A yield that is unusually low may mean the REIT is undervalued or facing headwinds.

Frequently Asked Questions

Can I buy REITs inside a retirement account like an IRA?

Yes. Holding REITs in an IRA, Roth IRA, or 401(k) shields you from the ordinary income tax on dividends. This is one of the best ways to own REITs because it avoids the tax drag that comes with holding them in a regular brokerage account.

Do REITs pay dividends every month or every quarter?

Most REITs pay quarterly dividends, though some pay monthly or annually. Check the REIT's investor relations page or your brokerage statement to see the payment schedule. Monthly payers can provide steadier income, but the dividend amount may be smaller.

What happens to my REIT shares if the company goes bankrupt?

If a REIT files for bankruptcy, shareholders are last in line to recover anything. Creditors and bondholders get paid first. In most bankruptcies, common shareholders lose their entire investment. This is why checking debt levels and financial health before investing matters.

Can I lose money on a REIT even if it pays dividends?

Yes. The share price can fall even as the REIT pays dividends. If you buy at $50 and the price drops to $35, you have lost $15 per share, even if you received $3 in dividends. Your total return includes both the dividend and the change in share price.

Are REITs a good hedge against inflation?

Potentially. Real estate values and rents often rise with inflation, so REITs can provide some inflation protection. However, rising inflation also increases interest rates, which can hurt REIT prices in the short term. The relationship is complex and depends on the specific REIT and economic conditions.