Whether REITs Make Sense for Your Portfolio Right Now

REITs can be a good investment now, but only if they fit your specific situation and goals — not because of the current moment

The question "are REITs good now?" assumes that timing matters more than it does. Whether a REIT belongs in your portfolio depends on what you own already, how much risk you can handle, and what you need the money for — not on whether interest rates are high or real estate prices are climbing. That said, the conditions right now do affect which REITs make sense and what you should expect to earn.

REITs have become more attractive to some investors recently because interest rates have risen. When the Federal Reserve raises rates, bond yields go up, and REIT dividend yields have risen alongside them. If you were getting 2% from a bond five years ago and 5% from a REIT, the gap has narrowed. That makes REITs less obviously better than safer alternatives — which is actually useful information for deciding whether to own them.

The harder question is whether real estate itself is a good buy right now. Office buildings are struggling because remote work has not reversed. Apartment buildings in some cities have too many units chasing too few renters. Retail property is still adjusting to online shopping. Industrial warehouses and data centers, by contrast, have stayed strong. A REIT that owns the right kind of property in the right location can still perform well. A REIT that owns the wrong kind can lag for years.

Key Takeaways

• REITs are worth considering if you want real estate exposure but do not have the cash or expertise to buy property directly, and they belong in a diversified portfolio rather than as a bet on real estate prices.
• Rising interest rates have made REIT dividends more competitive with bonds, which means you should compare what a REIT pays against what you could earn in a high-yield savings account or bond fund before buying.
• The type of property a REIT owns matters far more than the current moment — industrial and data center REITs have performed differently than office or retail REITs over the past few years.
• REITs are more volatile than bonds but less volatile than stocks, and they can move in different directions than stocks, which is why some investors use them for balance rather than growth.
• If you already own real estate or have most of your money in stocks, adding a REIT may not improve your portfolio — consider whether you are solving a real problem or just chasing yield.

When a REIT makes sense in your portfolio

A REIT is useful if you want exposure to real estate but cannot or do not want to buy property yourself. Buying a rental house or apartment building requires a down payment of 20% to 25%, a mortgage application, property management, and the ability to handle a tenant problem at 2 a.m. A REIT gives you the real estate returns without those headaches — and you can sell your shares in seconds if you need cash.

REITs also work well for diversification. If most of your money is in stocks, adding a REIT can reduce the damage when stocks fall, because real estate does not always move the same direction. During the 2020 stock market crash, some REITs fell but others held steady or rose. That stability is worth something, even if it means you do not capture every gain when stocks surge.

A third reason to own a REIT is income. REITs must distribute at least 90% of their taxable income to shareholders as dividends, so they tend to pay more than stocks do. If you need cash flow from your investments — to live on in retirement, for example — a REIT can provide it. Just remember that the dividend is not assistance programs; it comes from the rent the REIT collects, and if the REIT's properties fall in value, the dividend may fall too.

When REITs are probably not the right choice

If you already own rental property, adding a REIT does not diversify you — it concentrates your bet on real estate. You already have real estate exposure, and adding more of it means you are betting that property values and rents will rise. That might be true, but it is not diversification.

REITs also make less sense if you have a short time horizon. If you need the money in three to five years, the ups and downs of real estate prices could force you to sell at a bad time. REITs are better suited to money you can leave alone for at least seven to ten years.

Finally, REITs are not a good choice if you are chasing yield without understanding what you own. A REIT that pays 8% might be paying that much because the market thinks the properties are risky, or because the REIT is borrowing heavily to boost the dividend, or because it is in a sector that is struggling. A REIT that pays 4% might be safer and more likely to keep paying that dividend for years. Compare the yield to the risk, not just to the yield of other REITs.

How current interest rates affect REIT returns

When the Federal Reserve raises interest rates, two things happen to REITs. First, the cost of borrowing goes up. Most REITs borrow money to buy property, so higher rates mean higher expenses and lower profits. That pushes REIT prices down in the short term.

Second, higher rates make bonds and savings accounts more attractive. If you can earn 5% in a high-yield savings account with no risk, you are less likely to buy a REIT that pays 5% and carries the risk that property values could fall. This pushes REIT prices down as well.

Over time, though, higher rates can actually help REITs. When rates are high, new construction slows because borrowing is expensive. That means fewer new apartments, office buildings, and warehouses are built. With less new supply, existing properties become more valuable and rents rise. A REIT that owns those properties can raise the rents it charges tenants, which increases the dividend. This takes years to play out, but it is why some investors buy REITs when rates are high — they are betting on the long-term benefit.

Property type matters more than timing

Not all REITs have performed the same way in recent years. Industrial REITs, which own warehouses and distribution centers, have done well because e-commerce demand for storage space has stayed strong. Data center REITs have also performed well as companies need more space for servers and cloud computing. Apartment REITs have been mixed — some cities have too many units, while others have too few.

Office REITs have struggled. Remote work has not reversed, and many companies are using less office space than they did before 2020. Some office buildings have been converted to apartments or hotels, but that conversion is slow and expensive. An office REIT today is betting that companies will eventually need offices again, or that the conversion will succeed. That is a longer and riskier bet than owning an industrial REIT.

Retail REITs have also struggled, though less severely than office. Online shopping has reduced the need for physical stores, but grocery stores, pharmacies, and restaurants still need locations. A retail REIT that owns properties leased to essential businesses has held up better than one that owns mall space.

The point is this: whether now is a good time to buy a REIT depends almost entirely on which REIT you are considering, not on whether it is 2024 or 2025. A strong industrial REIT can be a good buy in almost any environment. A struggling office REIT can be a bad buy even when interest rates are falling.

How to compare a REIT to other income investments

Before you buy a REIT, compare what it pays to what you could earn elsewhere. Look at the dividend yield — the annual dividend divided by the share price. If a REIT pays $2 per share and costs $50 per share, the yield is 4%.

Then compare that to a high-yield savings account, a bond fund, or a Treasury bond. If a savings account pays 4.5% with no risk, and a REIT pays 4% with the risk that property values could fall, the REIT is not offering enough extra return to justify the risk. If the REIT pays 6% and the savings account pays 4.5%, the extra 1.5% might be worth the risk — but only if you understand what could go wrong.

Also check whether the dividend is sustainable. Look at the REIT's funds from operations, or FFO — a measure of how much cash the REIT actually generates from renting property. If the dividend is much higher than the FFO, the REIT may be borrowing money to pay it, which is not sustainable. A REIT that pays a dividend lower than its FFO is probably safe and might even raise the dividend over time.

Tax consequences of owning REITs

REIT dividends are taxed as ordinary income, not as capital gains. That means if you earn $1,000 in REIT dividends, you pay tax at your regular income tax rate, which is usually higher than the capital gains rate. This makes REITs less attractive in a regular taxable account, especially if you are in a high tax bracket.

REITs work better inside a retirement account — an IRA, 401(k), or similar account where dividends are not taxed until you withdraw the money. If you are choosing between owning a REIT in a taxable account or in a retirement account, put it in the retirement account and put stocks in the taxable account instead.

Building a REIT position without overcommitting

If you decide a REIT belongs in your portfolio, start small. A common approach is to put 5% to 15% of your portfolio in real estate — either through one REIT or through a REIT index fund that owns dozens of them. An index fund spreads the risk across many properties and property types, so you do not have to pick the right REIT.

If you want to own individual REITs, research the property type first. Decide whether you think industrial, apartment, office, retail, or data center property is likely to perform well. Then pick one or two REITs in that category and monitor them. Do not buy five different REITs because you think they are all good — that is just making your portfolio harder to manage without adding real diversification.

Remember that a REIT is a long-term holding. Real estate values and rents move slowly, so give yourself at least five to seven years before judging whether your decision was right. If you are checking the price every week and worrying about short-term moves, you probably should not own individual REITs at all.

Frequently Asked Questions

Should I buy a REIT now because interest rates are high?

High interest rates make REIT dividends more competitive with bonds, but they also make borrowing more expensive for REITs and reduce property values in the short term. The real question is whether the specific REIT you are considering is a good value at today's price, not whether rates are high or low. Compare the dividend yield to what you could earn in a savings account or bond, and research the properties the REIT owns.

Can I lose money in a REIT?

Yes. REIT share prices can fall if property values decline, if rents drop, or if interest rates rise sharply. You can also lose money if the REIT borrows too much and cannot pay its debts. REITs are less volatile than stocks but more volatile than bonds, so expect price swings of 10% to 20% in a year.

Is a REIT index fund better than picking individual REITs?

For most investors, yes. A REIT index fund owns dozens of REITs across different property types and regions, so you get diversification without having to research individual companies. You also pay lower fees. Individual REITs can outperform the index if you pick the right ones, but picking right is difficult and requires ongoing research.

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

No legal minimum exists, but REITs are designed as long-term holdings. Real estate values and rents move slowly, so short-term price swings can be misleading. If you need the money in less than five years, a REIT is probably not the right investment.

What happens to my REIT if the real estate market crashes?

The REIT's share price will fall, and the dividend may fall as well if rents drop or the REIT cannot collect rent from tenants. However, REITs that own essential properties — like grocery stores or industrial warehouses — tend to hold up better than those that own office or luxury retail space. Diversification across property types helps protect you.