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 company that buys, owns, and manages real estate — apartments, office buildings, shopping centers, warehouses, hotels — and then sells shares to investors. When you buy a share, you own a piece of that real estate portfolio. The company collects rent from tenants, pays its operating costs, and distributes most of its profits to shareholders as dividends.

REITs exist because federal law allows them to avoid paying corporate income tax if they meet certain rules. The main rule: they must distribute at least 90 percent of their taxable income to shareholders each year. That is why REIT dividends tend to be higher than dividends from regular stocks. In exchange, you pay income tax on those dividends when you receive them.

You do not own the actual building. You own a financial stake in the company that does. If the company sells a property or buys a new one, your share of the portfolio changes, but you do not make that decision. The REIT's management team does.

Key Takeaways

  • A REIT is a company that owns real estate and distributes most of its profits to shareholders as dividends, which are usually higher than dividends from regular stocks.
  • REITs must distribute at least 90 percent of their taxable income to shareholders and are taxed at the corporate level only if they fail to do so.
  • You can buy REIT shares through a brokerage account the same way you buy any stock, and they trade on major exchanges during market hours.
  • Different REITs focus on different property types — residential, commercial, industrial, healthcare — so your returns depend on which sector performs well.
  • REIT dividends are taxed as ordinary income, not as capital gains, which means you pay your regular income tax rate on the money you receive.

How REITs are structured and what types exist

REITs come in three main structures. A publicly traded REIT trades on a stock exchange like the NYSE or NASDAQ, so you can buy and sell shares during market hours at the current market price. An non-traded REIT does not trade on an exchange; you buy shares directly from the company, usually through a broker, and selling is harder and slower. A private REIT is not open to the public at all — only to accredited investors or employees.

REITs also divide by property type. Residential REITs own apartment buildings and single-family rental homes. Commercial REITs own office buildings, retail centers, and shopping malls. Industrial REITs own warehouses and distribution centers. Healthcare REITs own medical office buildings, senior living facilities, and hospitals. Specialty REITs own data centers, cell towers, or self-storage units. Each sector responds differently to economic conditions — office REITs struggled during the pandemic shift to remote work, while industrial REITs benefited from e-commerce growth.

Some REITs are diversified, meaning they own multiple property types across different regions. Others are focused, owning only one type of property or operating in one geographic area. A focused REIT's performance depends heavily on how that single sector performs, which means higher risk but potentially higher returns.

How to buy REIT shares and what it costs

You buy publicly traded REIT shares through a brokerage account — the same way you buy any stock. Open an account with a broker like Fidelity, Charles Schwab, E-Trade, or Vanguard, deposit money, search for the REIT by its ticker symbol, and place an order. The cost is whatever the share price is at the time you buy, plus any trading fees your broker charges. Many brokers now offer commission-free stock trades, so you may pay nothing extra.

The minimum investment is one share. If a REIT's share price is $50, you can buy one share for $50. If you want to own a diversified basket of REITs without picking individual ones, you can buy a REIT mutual fund or REIT exchange-traded fund (ETF), which holds dozens of REITs in one fund. These funds charge an annual expense ratio — typically 0.5 to 1 percent of your investment per year — but they spread your risk across many companies.

Non-traded REITs usually require a higher minimum investment, often $1,000 to $25,000, and charge higher fees. They also lock your money in for years, making them less liquid. Most individual investors stick with publicly traded REITs because they are easier to buy, sell, and understand.

Dividends, taxes, and what you actually receive

REITs must distribute at least 90 percent of their taxable income to shareholders. That income comes from rent collected minus operating expenses. If a REIT earns $10 million in taxable income, it must distribute at least $9 million. Most distribute closer to 100 percent. That money goes to shareholders as dividends, usually paid quarterly.

The amount you receive depends on how many shares you own and the REIT's dividend per share. If a REIT pays $2 per share per year and you own 100 shares, you receive $200 in annual dividends. Some REITs reinvest dividends automatically if you set that up, buying more shares with the money. Others pay cash to your brokerage account.

Here is the tax catch: REIT dividends are taxed as ordinary income, not as capital gains. If you are in the 24 percent federal tax bracket, you pay 24 percent tax on your REIT dividends. Capital gains from stocks you hold long-term are taxed at 15 or 20 percent, depending on your income. This makes REITs less tax-efficient in taxable accounts. Many investors hold REITs in tax-deferred accounts like IRAs or 401(k)s to avoid this.

Risks and reasons REIT performance varies

REIT returns depend on two things: dividend income and share price appreciation. If the REIT's properties generate steady rent and the company is well-managed, dividends stay high and the share price may rise. If tenants stop paying rent, properties sit vacant, or interest rates rise (making bonds more attractive than dividend stocks), the share price can fall sharply.

Interest rates matter more to REITs than to most stocks. REITs borrow money to buy properties. When the Federal Reserve raises interest rates, borrowing costs rise, cutting into profits. When rates fall, REITs become more attractive because their dividends look better compared to bond yields. This makes REITs sensitive to Fed policy in ways that other stocks are not.

Economic recessions hurt REITs unevenly. Residential REITs may hold up because people still need housing. Office REITs suffer when companies downsize or go remote. Retail REITs struggle when stores close. Industrial REITs often thrive during recessions because e-commerce grows. Your returns depend heavily on which sector you choose.

REITs also carry liquidity risk. Publicly traded REITs are liquid — you can sell shares any trading day. Non-traded REITs are not. If you need cash and own a non-traded REIT, you may have to wait months or years to sell, or sell at a steep discount.

REITs versus owning rental property directly

REITs and direct real estate ownership both generate income from property, but they work very differently. When you own a rental property, you control it — you choose tenants, set rent, handle repairs, and keep all profits after expenses and taxes. You also handle all the work and liability. A REIT does all that for you, but you have no control and receive only the dividend portion of profits.

REITs are more liquid. You can sell REIT shares in seconds. Selling a rental property takes months and costs thousands in realtor fees and closing costs. REITs require less capital to start — one share might cost $50. A rental property requires a down payment of 20 to 25 percent of the purchase price, plus closing costs, often $50,000 or more.

Direct real estate ownership offers tax deductions — mortgage interest, property taxes, repairs, depreciation — that reduce your taxable income. REIT dividends offer no deductions. However, direct ownership also carries tenant risk, maintenance emergencies, and vacancy periods where you earn nothing. REITs spread that risk across hundreds or thousands of properties.

How to research and compare REITs

Start by identifying the property type and geographic focus you want. Do you want residential, industrial, or healthcare? National exposure or a specific region? Then look at the REIT's dividend yield — the annual dividend per share divided by the share price. A REIT trading at $50 per share paying $3 per year has a 6 percent yield. Higher yields attract investors but may signal risk or that the market expects the dividend to fall.

Check the REIT's funds from operations (FFO), which is similar to earnings for a REIT. It tells you how much cash the company actually generated from operations. Compare FFO to the dividend to see if the dividend is sustainable. If FFO is $5 per share and the dividend is $4, the company has room to maintain or grow it. If FFO is $3 and the dividend is $4, the company is paying out more than it earns, which is unsustainable.

Look at the REIT's debt-to-assets ratio — how much the company borrowed relative to what it owns. Higher debt means higher risk if interest rates rise or the economy weakens. Most REITs publish these numbers in quarterly reports and on their investor relations websites. Financial websites like Morningstar, Yahoo Finance, and Seeking Alpha also provide REIT analysis and comparisons.

Frequently Asked Questions

Can I lose money in a REIT?

Yes. If the REIT's properties lose value, tenants stop paying rent, or interest rates rise sharply, the share price can fall. You could sell for less than you paid. Dividends can also be cut if the company's income drops. However, publicly traded REITs are diversified across many properties, which reduces the risk compared to owning a single rental property.

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

No, not for publicly traded REITs. You can buy and sell shares any trading day. Non-traded REITs often have holding periods — sometimes five to ten years — before you can sell. Check the prospectus before you buy a non-traded REIT to understand the lock-up period.

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

A REIT is a company that owns real estate. A real estate mutual fund is a fund that owns shares in multiple REITs or real estate companies. A REIT fund gives you diversification across many REITs in one purchase, but you pay an annual fee. Buying individual REIT shares gives you more control but requires more research.

Are REIT dividends safe?

Dividends are not may provide. A REIT can cut its dividend if income falls. However, REITs are required to distribute 90 percent of taxable income, so they have strong incentive to maintain dividends. Historically, REIT dividends have been more stable than stock dividends, but they are not risk-free.

Can I buy REITs in a retirement account?

Yes. You can hold REIT shares in an IRA, 401(k), or other tax-deferred account. This is actually recommended because REIT dividends are taxed as ordinary income, and holding them in a retirement account avoids that tax until you withdraw money.