A REIT is a company that owns real estate and pays you a share of the income it makes

A Real Estate Investment Trust (REIT) is a corporation that buys, owns, and manages properties — apartment buildings, office towers, shopping centers, warehouses, hotels, or medical facilities. Instead of keeping all the rental income, a REIT must distribute at least 90 percent of its taxable income to shareholders each year. When you own shares of a REIT, you own a piece of that income stream.

The core idea is simple: you get exposure to real estate returns without buying a building yourself, managing tenants, or putting down a large down payment. You buy shares like you would buy stock in any other company, and the REIT's management handles the property operations.

REITs trade on stock exchanges (like NYSE or NASDAQ), which means you can buy and sell them during market hours. This liquidity — the ability to convert your investment to cash quickly — is one of the main differences between owning REIT shares and owning rental property directly.

Key Takeaways

  • REITs must distribute at least 90 percent of taxable income to shareholders, which is why they often pay higher dividends than typical stocks.
  • You can buy REIT shares through a regular brokerage account, the same way you buy any stock, without needing a large down payment or a mortgage.
  • REIT income is taxed as ordinary income, not as capital gains, so the tax treatment is different from owning property directly.
  • Different REITs focus on different property types — residential, commercial, industrial, healthcare — so you can choose where your money goes.
  • REIT share prices move with the stock market and interest rates, so your investment value can fluctuate daily.

How REIT dividends work and why they are higher than most stocks

Because REITs must distribute 90 percent of taxable income to shareholders, they typically pay dividends of 3 to 6 percent per year — often higher than the average stock dividend. That income comes from rent collected on the properties the REIT owns.

When you receive a REIT dividend, you have a choice: take the cash or reinvest it to buy more shares. Many investors set up automatic reinvestment so their dividends buy additional shares without them having to act. Over time, this compounds your ownership stake.

The catch is that REIT dividends are taxed as ordinary income — at your regular tax rate — rather than as may have access to dividends, which get preferential tax treatment. This means a 4 percent REIT dividend may cost you more in taxes than a 4 percent dividend from a regular stock. You pay taxes on the dividend whether you take the cash or reinvest it.

The difference between owning a REIT and owning rental property

When you own rental property directly, you control the decisions: which tenants to accept, when to raise rent, what repairs to make, and when to sell. You also get to deduct mortgage interest, property taxes, maintenance costs, and depreciation on your tax return. These deductions can reduce your taxable income significantly.

With a REIT, you own shares in a company, not the property itself. The REIT's management makes all operational decisions. You have no control over which properties are bought or sold, how they are maintained, or how aggressively they raise rents. You also cannot deduct any expenses — the REIT pays taxes on its income after expenses, then distributes what remains to you.

REIT ownership requires far less capital to start. You can buy a single share for under $100 with most brokers. Rental property typically requires a down payment of 15 to 25 percent of the purchase price, plus closing costs, inspections, and immediate repair reserves. REITs also offer liquidity: you can sell your shares in minutes during market hours. Selling a rental property takes months and involves realtor commissions, closing costs, and inspections.

On the other hand, rental property lets you use leverage — borrowing money through a mortgage — to amplify returns. A REIT investor cannot borrow against their shares in the same way. Rental property also gives you control and the ability to build equity through forced savings (your mortgage payment). A REIT's value depends entirely on the market price of its shares and the dividends it pays.

Types of REITs and how to choose one

REITs specialize in different property sectors. An apartment REIT owns residential buildings. An office REIT owns commercial office space. Retail REITs own shopping centers and malls. Industrial REITs own warehouses and logistics facilities. Healthcare REITs own hospitals, medical offices, and senior living facilities. Specialty REITs own data centers, cell towers, or self-storage units.

Each sector performs differently depending on economic conditions. During a recession, apartment REITs may hold up better because people still need housing. Office REITs have faced headwinds as remote work reduces demand for commercial space. Industrial REITs have benefited from e-commerce growth. Healthcare REITs are tied to aging demographics and healthcare spending.

You can also choose between equity REITs, which own the properties outright, and mortgage REITs, which lend money to property owners and earn interest. Mortgage REITs are riskier and more sensitive to interest rate changes. Most beginning investors start with equity REITs.

Some investors buy individual REIT shares. Others buy a REIT index fund or exchange-traded fund (ETF) that holds dozens of REITs across multiple sectors. An index approach spreads your risk across many properties and management teams, which is often simpler for hands-off investors.

How interest rates and the economy affect REIT prices

REIT share prices move with interest rates. When the Federal Reserve raises rates, bonds and savings accounts become more attractive, so investors sell REITs to chase higher yields elsewhere. REIT prices fall. When rates drop, REITs become more attractive by comparison, and prices tend to rise.

The economy also matters. If unemployment rises and people delay moving or businesses downsize office space, property values and rents may fall, which hurts REIT earnings and dividends. If the economy is strong and unemployment is low, rents typically rise and vacancy rates fall, which benefits REITs.

Because REIT prices are tied to both interest rates and economic conditions, they do not move in lockstep with the stock market. This can make them useful for diversification — they often perform well when stocks struggle, and vice versa. However, they are still subject to market volatility, and your investment value can drop significantly in the short term.

Tax treatment of REIT investments

REIT dividends are taxed as ordinary income at your marginal tax rate, which is typically higher than the preferential rate for may have access to stock dividends. If you earn $100,000 per year and receive $2,000 in REIT dividends, that $2,000 is added to your taxable income and taxed at your regular rate.

If you hold REIT shares in a tax-advantaged account like a 401(k), IRA, or Roth IRA, you do not pay taxes on the dividends until you withdraw the money (or never, in the case of a Roth). This is one reason many investors hold REITs in retirement accounts rather than in regular taxable brokerage accounts.

When you sell REIT shares at a profit, you owe capital gains tax on the gain. If you held the shares for more than one year, you pay long-term capital gains tax, which is usually lower than ordinary income tax. If you held them for one year or less, you pay short-term capital gains tax at your ordinary income rate.

Risks and downsides of REIT investing

REITs are not risk-free. Share prices fluctuate daily based on market conditions, interest rates, and the REIT's performance. A REIT that owns office buildings faces long-term headwinds from remote work. A retail REIT may struggle if e-commerce continues to grow. A mortgage REIT can suffer if borrowers default or if interest rates move against the REIT's positions.

Dividend cuts are also a real risk. If a REIT's properties underperform, vacancy rates rise, or expenses spike, the company may reduce its dividend to preserve cash. This can cause the share price to fall sharply, since many REIT investors buy specifically for the dividend income.

REITs are also sensitive to economic recessions. During downturns, property values fall, rents may decline, and tenants may default on leases. A REIT that borrowed heavily to buy properties may struggle to service its debt if income drops. Leverage amplifies both gains and losses.

Finally, REITs lack the tax advantages of direct property ownership. You cannot deduct expenses, claim depreciation, or use a 1031 exchange to defer taxes on a sale. For high-income investors, this tax inefficiency can be significant.

Frequently Asked Questions

Can I lose money investing in REITs?

Yes. REIT share prices move with the market and can fall significantly. If you buy a REIT at $50 per share and it drops to $35, you have lost money on your investment. You can also lose money if a REIT cuts its dividend, which often causes the share price to fall. REITs are not may provide investments.

Should I hold REITs in a regular brokerage account or a retirement account?

Retirement accounts are usually better because REIT dividends are taxed as ordinary income, and holding them in a 401(k) or IRA lets you defer or avoid those taxes. In a taxable account, you pay taxes on dividends every year, which reduces your after-tax returns. If you have limited retirement account space, prioritize REITs there.

How much of my portfolio should be in REITs?

This depends on your goals, risk tolerance, and time horizon. A common approach is to allocate 5 to 15 percent of a diversified portfolio to real estate, either through REITs or direct property ownership. Some investors use REITs as a substitute for owning rental property. Others use them as a diversifier alongside stocks and bonds. There is no single right answer.

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

A REIT is a company that owns and operates real estate. A real estate mutual fund is a fund that holds shares of multiple REITs or real estate companies. A mutual fund gives you instant diversification across many REITs and property types. A single REIT concentrates your investment in one company and one property sector.

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

No. You can buy a single REIT share for under $100 with most brokers. You can also buy REIT index funds or ETFs with as little as $1 to $100, depending on the fund. The barrier to entry is much lower than buying rental property, which typically requires tens of thousands of dollars in down payment and closing costs.