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

A Real Estate Investment Trust (REIT) is a corporation that buys, owns, and manages real estate — apartment buildings, office parks, shopping centers, warehouses, hotels, or medical facilities — and then distributes the income from those properties to people who own shares in the company. You do not own the building itself; you own a piece of the company that owns it. The company must pay out at least 90 percent of its taxable income to shareholders each year, which is why REIT shares often pay higher dividends than other stocks.

REITs exist because real estate requires large amounts of capital to purchase and maintain, and most individual investors cannot buy an office tower or a 200-unit apartment complex alone. A REIT pools money from many investors, buys properties with that capital, collects rent or lease payments, covers operating costs and debt service, and passes the remaining income back to shareholders. This structure lets you own a stake in commercial real estate without buying property yourself, managing tenants, or handling repairs.

Key Takeaways

  • REITs own and operate income-producing real estate and must distribute at least 90 percent of taxable income to shareholders annually.
  • You can buy REIT shares through a brokerage account just like any other stock, and you receive income through dividends rather than rent payments.
  • REITs focus on specific property types — apartments, offices, warehouses, hotels, or healthcare facilities — so you can target the sector you want exposure to.
  • REIT share prices move with the stock market and interest rates, so your investment value can go up or down regardless of the underlying property value.

How REITs generate income and pay shareholders

A REIT makes money the same way a landlord does: it collects rent or lease payments from tenants and keeps the difference after paying property taxes, maintenance, insurance, property management, and debt service. If a REIT owns an office building and collects $2 million in annual rent, and operating costs total $800,000, the remaining $1.2 million is taxable income. The REIT must distribute at least $1.08 million (90 percent) to shareholders as dividends, and can retain up to $120,000 for reinvestment or reserves.

You receive this income as a dividend payment, usually quarterly, based on the number of shares you own. If you own 100 shares of a REIT that pays a $1.50 annual dividend per share, you receive $150 per year in dividend payments. The dividend amount varies depending on how much income the REIT generates and how many shares are outstanding. Unlike owning a rental property directly, you do not receive a rent check from a tenant — the REIT handles all tenant relations, maintenance, and property management, and you receive only the dividend.

The difference between publicly traded and non-traded REITs

A publicly traded REIT is listed on a stock exchange (like the New York Stock Exchange) and you can buy and sell shares through any brokerage account during market hours, just like buying Apple or Microsoft stock. The share price changes throughout the day based on supply and demand. These REITs are regulated by the Securities and Exchange Commission (SEC) and must file regular financial reports. Most REIT investors buy publicly traded REITs because they are liquid, transparent, and low-cost to enter and exit.

A non-traded REIT is not listed on an exchange and shares are sold directly by the company or through financial advisors. You cannot easily sell your shares — there is no public market for them — and the company may charge high upfront fees (often 10 to 15 percent of your investment). Non-traded REITs are less regulated and less transparent than public ones. Most individual investors avoid them because of the high fees, lack of liquidity, and difficulty in determining the true value of the underlying properties.

What types of properties REITs own

REITs specialize in different property sectors, and each sector has different income patterns and risks. An apartment REIT owns residential rental buildings and benefits when housing demand is strong and rents rise. An office REIT owns commercial office space and collects lease payments from companies; office REITs have faced headwinds since the pandemic shifted work-from-home patterns. A retail REIT owns shopping centers and strip malls; these have struggled as e-commerce grows. A warehouse REIT owns logistics and distribution facilities and has performed well as online shopping drives demand for storage and fulfillment space.

Other common REIT types include healthcare REITs (medical office buildings, senior housing, hospitals), hotel REITs (which depend on travel and tourism), and data center REITs (which own the physical infrastructure that stores and processes digital information). Some REITs own a mix of property types, while others focus on a single sector. The sector matters because different property types respond differently to economic conditions, interest rates, and demographic trends. Before buying a REIT, you should understand what properties it owns and whether those properties are likely to generate stable income in the years ahead.

How REIT share prices move and what affects them

REIT share prices are driven by two forces: the income the REIT generates (which determines the dividend) and investor sentiment about real estate and interest rates. If a REIT increases its dividend because rents rose or occupancy improved, the share price often rises because the investment becomes more attractive. If a REIT cuts its dividend because properties are vacant or operating costs spiked, the share price typically falls.

Interest rates have a large effect on REIT prices because REITs borrow money to buy properties, and higher interest rates make that debt more expensive. When the Federal Reserve raises rates, REIT share prices often fall because investors can earn higher returns from bonds and savings accounts, making REIT dividends less attractive by comparison. Conversely, when rates fall, REIT prices often rise. This means your REIT investment can lose value even if the underlying properties are performing well, simply because interest rate expectations have changed. The stock market also affects REIT prices — during broad market downturns, REIT shares often sell off along with other stocks, regardless of property fundamentals.

Tax treatment of REIT dividends

REIT dividends are taxed differently than stock dividends. Most REIT dividends are taxed as ordinary income at your regular income tax rate, not at the lower capital gains rate that applies to stock dividends. This means if you are in the 24 percent tax bracket and receive $1,000 in REIT dividends, you owe $240 in federal income tax on that amount (before considering state taxes). By contrast, may have access to stock dividends are taxed at 15 or 20 percent for most taxpayers, making them more tax-efficient.

Some REIT dividends may be classified as return of capital or capital gains, which are taxed differently, but the majority are ordinary income. This tax treatment is one reason many investors hold REITs in tax-deferred accounts like IRAs or 401(k)s, where dividends are not taxed until you withdraw the money. If you hold REIT shares in a regular taxable brokerage account, you will owe taxes on the dividends each year, even if you do not sell the shares. Always consult a tax professional about how REIT dividends affect your specific tax situation.

Risks and limitations of REIT investing

REITs are not risk-free. Property values can decline if the local economy weakens, if a major employer leaves the area, or if the property type falls out of favor (as happened with retail during the e-commerce shift). Tenants can default on leases or move out, leaving the REIT with vacant space and no income. Interest rate increases raise the REIT's borrowing costs and can reduce profitability. A recession can hurt multiple property types at once — hotels suffer when travel drops, offices suffer when companies downsize, and apartments suffer when unemployment rises.

REIT share prices are also volatile. A REIT that owns solid properties generating steady income can still see its stock price fall 20 or 30 percent in a market downturn. You have no control over management decisions, property acquisitions, or dividend policy — you are a passive investor with no say in how the company operates. If you need to sell your shares during a market decline, you may have to accept a loss. REITs are also sensitive to interest rate changes, which means they perform differently than stocks and bonds at different points in the economic cycle.

Frequently Asked Questions

Can I lose money investing in a REIT?

Yes. REIT share prices can fall if property values decline, tenants default, interest rates rise, or the stock market declines broadly. You can also lose money if you sell shares when the price is lower than what you paid. However, if you hold the shares long-term and the REIT maintains its dividend, you may recover losses over time.

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

No. With publicly traded REITs, you can buy and sell shares whenever you want during market hours. Non-traded REITs often have holding periods or restrictions on when you can sell, so check the prospectus before investing. There are no tax penalties for holding a REIT for a short time, though you will owe taxes on any gains.

What is the difference between a REIT and owning rental property directly?

With a REIT, you own shares in a company and receive dividends; you do not own the property itself and have no management responsibilities. With direct ownership, you own the property, collect rent, handle maintenance and tenant issues, and can deduct expenses. REITs offer liquidity and diversification; direct ownership offers control and potential tax deductions.

How much money do I need to start investing in a REIT?

Most publicly traded REITs trade for $20 to $100 per share, so you can start with a few hundred dollars through a brokerage account. Non-traded REITs typically require minimum investments of $1,000 to $25,000 or more. There is no legal minimum, but your brokerage may have account minimums.

Are REIT dividends may provide?

No. A REIT can cut or eliminate its dividend if the company's income declines or if management decides to retain more cash. Dividend cuts are common during recessions or when property values fall. Past dividend payments do not may provide future payments.