A REIT is a company that owns and operates real estate, and you can buy shares in it like a stock

REIT stands for Real Estate Investment Trust. It is a corporation that buys, owns, and manages real estate — apartment buildings, office parks, shopping centers, warehouses, hotels, or other properties — and then sells shares to investors. When you buy shares in a REIT, you own a piece of that real estate portfolio without having to buy a building yourself or manage tenants.

REITs must follow specific rules set by the Securities and Exchange Commission (SEC). The main requirement is that a REIT must distribute at least 90 percent of its taxable income to shareholders as dividends each year. That is why REITs often pay higher dividends than regular stocks — the law requires it.

You buy and sell REIT shares through a brokerage account, the same way you would buy stock in Apple or Microsoft. The price moves up and down based on market demand, the performance of the properties the REIT owns, and interest rates. REITs trade on major stock exchanges like the NYSE and NASDAQ.

Key Takeaways

  • A REIT is a company that owns real estate and sells shares to investors, allowing you to own a piece of property without buying a building directly.
  • REITs must distribute at least 90 percent of taxable income to shareholders as dividends each year, which is why they typically pay higher dividends than regular stocks.
  • You buy and sell REIT shares through a brokerage account just like any other stock, and the price fluctuates based on market conditions and property performance.
  • Different REITs focus on different property types — residential, commercial, industrial, healthcare, or mixed — so you can choose based on your investment goals.
  • REIT dividends are taxed as ordinary income, not at the lower capital gains rate, which affects your tax bill compared to other investments.

Types of REITs and what properties they own

REITs specialize in different kinds of real estate. A residential REIT owns apartment complexes and single-family rental homes. A commercial REIT owns office buildings and retail spaces. An industrial REIT owns warehouses and distribution centers. A healthcare REIT owns hospitals, medical office buildings, and senior living facilities. A hotel REIT owns and operates hotels.

Some REITs are diversified, meaning they own multiple property types across different regions. Others are specialized, owning only one type of property or focusing on a single geographic area. Your choice depends on where you think real estate values will grow and what kind of income stream you want.

You can also invest in a mortgage REIT, which does not own properties directly but instead lends money to real estate developers and buys mortgages. Mortgage REITs behave differently from property REITs and carry different risks.

How REITs make money and pay you

REITs earn money two ways: from rent paid by tenants and from selling properties at a profit. When a REIT collects rent from an office building or apartment complex, that money goes into the company's income. After paying operating costs — maintenance, property taxes, insurance, management — the REIT distributes most of what is left to shareholders as dividends.

You receive dividends either as cash deposited into your brokerage account or as additional shares, depending on how your account is set up. The dividend payment schedule varies by REIT — some pay monthly, others quarterly. You can also make money if the REIT's share price rises and you sell your shares for more than you paid.

The total return on a REIT investment comes from two sources: the dividend you receive and any increase in the share price. If a REIT's properties appreciate in value or the company acquires new high-performing properties, the share price often rises. If properties lose value or tenants move out, the share price typically falls.

Publicly traded REITs versus private REITs

A publicly traded REIT is listed on a stock exchange and you can buy shares through any brokerage account. These REITs are regulated by the SEC, file public financial reports, and their share prices are transparent and updated constantly. Most individual investors buy publicly traded REITs because they are easy to access and liquid — you can sell your shares quickly.

A private REIT is not listed on an exchange. You typically need a financial advisor or direct relationship with the REIT company to buy shares, and there is often a minimum investment of $25,000 or more. Private REITs are less regulated, less transparent, and harder to sell — you may have to hold them for years. They are usually marketed to wealthy investors or through retirement accounts.

For most people, publicly traded REITs are the simpler choice. You can research them online, see their financial statements, and buy shares in minutes through a brokerage app.

Tax treatment of REIT dividends and capital gains

REIT dividends are taxed as ordinary income, not as may have access to dividends. This means they are taxed at your regular income tax rate, which is usually higher than the capital gains rate. If you are in the 24 percent tax bracket, a REIT dividend is taxed at 24 percent, whereas a dividend from a regular stock might be taxed at 15 percent.

If you sell REIT shares for more than you paid, the profit is a capital gain and is taxed at the capital gains rate — either short-term (if you held the shares less than a year) or long-term (if you held them a year or more). Long-term capital gains are usually taxed at a lower rate than ordinary income.

Because of the tax treatment, many investors hold REITs in tax-advantaged retirement accounts like IRAs or 401(k)s, where dividends and capital gains are not taxed until you withdraw the money. Holding REITs in a regular taxable brokerage account means you pay taxes on dividends every year, even if you do not sell the shares.

Risks of investing in REITs

REIT share prices move up and down like any stock. If interest rates rise, investors often move money out of REITs and into bonds, causing REIT prices to fall. If the economy slows and tenants cannot pay rent or move out, the REIT's income drops and the share price falls.

Some REITs carry specific risks based on the properties they own. A hotel REIT is vulnerable to travel downturns. A retail REIT is vulnerable to store closures and e-commerce competition. A residential REIT is vulnerable to rent control laws and housing market downturns. You should research the properties a REIT owns and the economic factors that affect them.

Leverage is another risk. Many REITs borrow money to buy more properties, which increases returns when things go well but amplifies losses when they do not. A REIT with high debt may be riskier than one with low debt, especially if interest rates rise and borrowing becomes more expensive.

How to research and compare REITs

Start by looking at the REIT's annual report and quarterly earnings reports, which are filed with the SEC and available on the company website or on financial websites like Yahoo Finance or Seeking Alpha. These reports show what properties the REIT owns, how much rent it collects, what expenses it pays, and how much it distributes to shareholders.

Compare the dividend yield — the annual dividend divided by the share price — across similar REITs. A higher yield sounds attractive, but it can also signal that the market thinks the REIT is riskier or that the dividend may be cut. Look at the REIT's payout ratio (the percentage of income paid out as dividends) and debt-to-equity ratio (how much the REIT borrows relative to shareholder equity). Lower debt and a sustainable payout ratio are generally safer.

Read analyst reports and REIT-focused publications to understand the trends in the property type the REIT owns. If you are considering a retail REIT, for example, understand how e-commerce is affecting brick-and-mortar stores. If you are considering a residential REIT, understand local rent trends and vacancy rates in the markets where it operates.

Frequently Asked Questions

Can I buy REIT shares in a retirement account?

Yes. You can hold REITs in an IRA, 401(k), or other tax-advantaged account. This is actually a common strategy because REIT dividends are taxed as ordinary income, so holding them in a retirement account lets you defer those taxes. Check with your account provider to confirm which REITs are available in your plan.

What is the minimum amount I need to invest in a REIT?

For publicly traded REITs, the minimum is usually the price of one share, which can range from $10 to $100 or more depending on the REIT. Some brokerages allow fractional share purchases, so you could invest less than the full share price. Private REITs typically require much larger minimums, often $25,000 or more.

Do I have to hold a REIT for a certain amount of time?

No. Publicly traded REITs are liquid — you can sell your shares anytime the market is open. There is no holding period. Private REITs often have lock-up periods where you cannot sell for several years, so check the terms before investing.

How often do REITs pay dividends?

It varies by REIT. Some pay monthly, others quarterly, and a few pay annually. Check the REIT's website or your brokerage statement to see the payment schedule. You can set up automatic reinvestment so dividends are used to buy additional shares, or take them as cash.

What happens to my REIT shares if the company is bought?

If another company acquires the REIT, your shares are typically exchanged for cash or shares in the acquiring company, depending on the deal terms. The acquiring company will notify shareholders of the terms and timeline. You may owe capital gains tax on any profit from the sale.