A REIT is a company that owns or finances income-producing real estate, and you can buy shares in it like a stock

REIT stands for Real Estate Investment Trust. It is a corporation that owns, operates, or finances properties that generate income — apartment buildings, office towers, shopping centers, warehouses, hotels, or medical facilities. When you buy shares of a REIT, you own a piece of that company and a claim on the income those properties produce. You do not own the property itself; you own a financial stake in the entity that does.

REITs exist because of a federal rule: if a company meets certain requirements — owning mostly real estate assets, distributing at least 90 percent of taxable income to shareholders as dividends, and having a certain structure — it can avoid paying corporate income tax. That tax break is passed to you as the shareholder. In exchange, REITs must be publicly traded (or at least registered), and their holdings and finances are disclosed to the public.

You can buy REIT shares through a brokerage account the same way you buy any stock. You can also own them inside a retirement account like an IRA or 401(k). Some REITs trade on major exchanges; others are traded over-the-counter or sold directly by the company.

Key Takeaways

  • A REIT is a company that owns or finances real estate and distributes most of its income to shareholders as dividends, which is why REIT shares often pay higher yields than stocks.
  • You buy and sell REIT shares through a brokerage account, not by purchasing property directly, so you need far less money to start and no landlord responsibilities.
  • REITs must own mostly real estate assets, be publicly traded or registered, and distribute at least 90 percent of taxable income to shareholders to may have access to for their tax status.
  • Different REITs focus on different property types — residential, commercial, industrial, healthcare — so your choice depends on what sector you want exposure to.
  • REIT dividends are taxed as ordinary income, not capital gains, which affects how much you keep after taxes compared to other investments.

The three main types of REITs and what they own

Equity REITs own the properties themselves. They collect rent from tenants, handle maintenance and operations, and pass the income to shareholders. Most REITs you will encounter are equity REITs. Examples include companies that own apartment complexes, office parks, or retail strips.

Mortgage REITs do not own property. Instead, they lend money to real estate developers and owners, and they earn income from the interest on those loans. They are riskier than equity REITs because they depend on borrowers repaying loans, and their returns fluctuate more with interest rate changes.

Hybrid REITs do both — they own some properties and finance others. They are less common than the other two types.

Within equity REITs, companies specialize by property type. A residential REIT might own apartment buildings. A healthcare REIT might own medical office buildings, senior living facilities, or hospitals. An industrial REIT might own warehouses and distribution centers. A retail REIT might own shopping centers. Knowing the property type matters because different sectors perform differently depending on the economy, interest rates, and tenant demand.

How REIT dividends work and what you receive

REITs must distribute at least 90 percent of their taxable income to shareholders. This is why REIT dividends are often higher than dividends from regular stocks. A REIT might pay 3 to 6 percent per year in dividends, though the exact amount varies by company and changes over time.

You receive dividends in cash, usually quarterly. The amount per share depends on how much income the REIT generated and how many shares are outstanding. If the REIT owns properties that are fully rented and well-maintained, dividends tend to be stable. If vacancy rises or property values fall, dividends may drop.

The tax treatment of REIT dividends is important: they are taxed as ordinary income, not as capital gains. This means if you hold a REIT in a regular taxable brokerage account, you pay your full income tax rate on the dividends, not the lower capital gains rate. That is one reason many investors hold REITs inside tax-advantaged accounts like IRAs, where the dividends are not taxed until you withdraw the money.

How REIT share prices move and what affects them

REIT share prices rise and fall based on supply and demand in the market, just like any stock. But several factors specific to real estate influence that price movement. If interest rates rise, REIT prices often fall because investors can get better returns from bonds, and because higher rates make it more expensive for REITs to borrow money to buy or improve properties. If a REIT's properties are in high-demand areas and rents are climbing, the share price may rise. If a major tenant leaves or a property sits vacant, the price may fall.

You can make money from a REIT in two ways: dividends and capital appreciation. If you buy shares at $50 and they rise to $60, you have a $10 gain per share. If the REIT pays $2 per share in annual dividends, you also earn that income. Some investors focus on the dividend income; others buy REITs expecting the share price to grow.

REIT prices are also sensitive to the broader real estate market. During a recession, commercial properties may lose tenants and REITs may underperform. During strong economic growth, demand for office and retail space may rise and REIT values may climb. This is why REITs are often used as a way to add real estate exposure to a diversified investment portfolio.

The difference between public and private REITs

Public REITs trade on stock exchanges like the New York Stock Exchange or NASDAQ. You can buy and sell shares instantly during market hours through any brokerage. Their holdings and financial results are disclosed regularly to the SEC and the public. Public REITs are liquid — you can convert your shares to cash quickly — but their share prices fluctuate daily with market sentiment.

Private REITs are not traded on exchanges. They are sold directly by the company, often through financial advisors, and you may have to hold them for years before you can sell. Private REITs have less transparency and higher fees, but some investors are drawn to them because the share price does not fluctuate daily. Private REITs are generally only available to accredited investors (those with high net worth or income).

Non-traded REITs are a middle ground — they are registered with the SEC but do not trade on an exchange. They are sold through brokers and financial advisors, and you typically cannot sell them easily. They carry higher fees than public REITs and are less transparent.

Risks and drawbacks of REIT investing

REITs are not risk-free. If the real estate market weakens, property values fall, or tenants cannot pay rent, REIT dividends may be cut or eliminated. During the 2008 financial crisis, many REITs lost significant value and slashed dividends. Interest rate increases hurt REIT prices because they raise borrowing costs and make bonds more attractive to investors.

REIT dividends are taxed as ordinary income, which can be a disadvantage compared to stocks that pay capital gains. If you hold a REIT in a taxable account and it pays a 5 percent dividend, you owe income tax on that 5 percent every year, even if you do not sell the shares.

Private and non-traded REITs carry additional risks: high fees (sometimes 10 percent or more of your investment), illiquidity (you cannot easily sell), and less transparency. Some private REITs have been involved in fraud or mismanagement.

REITs also carry market risk. A public REIT's share price can drop 20, 30, or 40 percent in a down market, just like any stock. If you need to sell during a downturn, you may lock in a loss.

How to research and compare REITs before investing

Start by identifying the property type you are interested in — residential, office, retail, industrial, healthcare, or a mix. Then look at the REIT's financial statements, which are filed with the SEC and available on the company website or on financial websites like Yahoo Finance or Morningstar.

Key metrics to examine include the dividend yield (annual dividend divided by share price), the occupancy rate (percentage of properties that are rented), and funds from operations or FFO (a measure of cash flow specific to REITs). A REIT with high occupancy and stable FFO is generally more reliable than one with falling occupancy or declining cash flow.

Compare the REIT's dividend history. Has it been stable, rising, or falling? A REIT that has raised its dividend for many years is often a sign of a well-managed company, though past performance does not may provide future results. Also look at the REIT's debt level — too much debt makes the company vulnerable if interest rates rise or property values fall.

Read the prospectus or annual report to understand what properties the REIT owns, where they are located, and who the major tenants are. A REIT concentrated in one city or dependent on one large tenant carries more risk than a diversified REIT.

Frequently Asked Questions

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

Yes. You can hold REIT shares in a traditional IRA, Roth IRA, or 401(k) through most brokerages. This is often a smart move because REIT dividends are taxed as ordinary income, and holding them in a tax-advantaged account shields you from that tax until you withdraw the money.

Do I have to pay property taxes or maintenance costs if I own a REIT?

No. You own shares in a company, not the property itself. The REIT handles all property taxes, maintenance, insurance, and operations. You simply receive your share of the income as dividends.

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

For a public REIT, the minimum is the price of one share, which can range from $10 to $100 or more depending on the company. You can buy fractional shares through most brokerages, so you could invest as little as $1. Private REITs typically require a much larger minimum investment, often $25,000 to $50,000 or more.

How do REIT returns compare to owning rental property directly?

REITs offer lower returns on average but require far less money and no landlord work. A rental property might generate 6 to 10 percent annual returns (including appreciation), but you need a down payment, handle repairs and tenant issues, and pay property taxes. A REIT might yield 3 to 6 percent with no work, and you can sell instantly if you need cash.

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

Your shares become worthless or nearly worthless. You lose your investment. REIT shares are not insured by the FDIC or any government agency. This is why researching the REIT's financial health and debt level before investing matters.