How to Buy and Own Real Estate Investment Trusts

How to buy a REIT

You buy a REIT the same way you buy a stock: through a brokerage account. Open an account with a broker — Fidelity, Charles Schwab, E*TRADE, and Vanguard are common choices — link a bank account, deposit money, and search for the REIT by its ticker symbol. Then place a buy order for the number of shares you want. The transaction settles in two business days, and you own the shares.

Most REITs trade on major exchanges like the NYSE or NASDAQ, so you can buy and sell them during regular market hours just like any other stock. Some REITs are not publicly traded — these are harder to buy and sell, require higher minimum investments, and are usually only available to accredited investors. For most people starting out, publicly traded REITs are the practical choice.

The cost to buy is minimal: most brokers charge no commission on stock trades, though you may pay a small fee if you use a financial advisor to place the order for you. The main cost is the price of the shares themselves, which varies by REIT and changes throughout the day.

Key Takeaways

• You buy publicly traded REITs through a regular brokerage account using the same process as buying stocks, with no special paperwork or real estate knowledge required.
• REIT shares trade during market hours and can be sold quickly if you need cash, unlike owning physical property.
• Most REITs must distribute at least 90 percent of their taxable income to shareholders as dividends, which often provide higher yield than stocks but are taxed as ordinary income.
• You can hold REITs in tax-advantaged accounts like IRAs and 401(k)s to reduce the tax impact of dividend payments.
• Diversifying across different REIT types — residential, commercial, industrial, healthcare — reduces the risk that one sector's downturn hurts your whole position.

Understanding REIT dividends and how they are taxed

REITs are required by law to distribute at least 90 percent of their taxable income to shareholders. This means most of your return comes as dividends rather than price appreciation. A REIT might pay a 3 to 6 percent dividend yield, which is often higher than the dividend yield of a typical stock.

The catch is how those dividends are taxed. REIT dividends are taxed as ordinary income at your regular tax rate, not at the lower capital gains rate that applies to stock dividends. If you earn $50,000 a year and receive $2,000 in REIT dividends, that $2,000 is added to your income and taxed at your marginal rate — potentially 22 or 24 percent depending on your bracket. A stock dividend of the same size might be taxed at 15 percent instead.

This tax difference matters most if you hold REITs in a taxable account. If you hold them in a tax-deferred account — an IRA, a Roth IRA, or a 401(k) — the dividends are not taxed until you withdraw the money, or not at all in the case of a Roth. Many investors use tax-advantaged accounts specifically to shelter REIT dividends from annual taxation.

Choosing between individual REITs and REIT funds

You can buy individual REIT shares, or you can buy a fund that holds many REITs. Each approach has a trade-off.

Buying individual REITs gives you control over which properties and which management teams you own. You can research a specific REIT's portfolio — say, a healthcare REIT that owns medical office buildings — and decide whether that bet makes sense. The downside is that you need to research each REIT, and owning just a few means you are exposed to the risk that one REIT underperforms or makes a bad acquisition.

A REIT fund — either a mutual fund or an ETF — holds dozens or hundreds of REITs across different property types and geographies. Vanguard Real Estate ETF (VNQ), iShares U.S. Real Estate ETF (IYR), and Schwab U.S. REIT ETF (SCHH) are examples. You own a slice of the whole market rather than betting on individual REITs. The trade-off is that you have less control: the fund manager decides which REITs to hold, and you own them all whether you agree with each choice or not. Funds also charge an annual expense ratio, typically 0.1 to 0.4 percent per year.

For most investors, a REIT fund is simpler and safer because it spreads risk across many properties and managers. Individual REITs make sense if you have strong conviction about a specific property type or management team and are willing to do the research.

Different types of REITs and what they own

REITs specialize in different kinds of real estate, and the type matters because different sectors perform differently depending on economic conditions.

Residential REITs own apartment buildings and single-family rental homes. They benefit when housing demand is strong and rents rise, but suffer when the economy weakens and people move in with family or delay moving out. Examples include Apartment Income REIT Corp (AIR) and American Homes 4 Rent (AMH).

Commercial REITs own office buildings, shopping centers, and other retail space. Office REITs have faced headwinds since the pandemic as companies adopted remote work and reduced office space. Retail REITs depend on foot traffic and consumer spending. Examples include Boston Properties (BXP) and Realty Income (O).

Industrial REITs own warehouses, distribution centers, and logistics facilities. These have been strong performers as e-commerce growth drives demand for warehouse space. Examples include Prologis (PLD) and Duke Realty (DRE).

Healthcare REITs own medical office buildings, hospitals, and senior living facilities. They benefit from an aging population and tend to be stable because healthcare demand does not drop sharply in recessions. Examples include Welltower (WELL) and Medical Properties Trust (MPW).

Specialty REITs own data centers, cell towers, self-storage facilities, or other niche properties. Data center REITs have grown as cloud computing and AI demand more server space. Examples include Equinix (EQIX) and Digital Realty (DLR).

A diversified REIT fund holds all or most of these types, so you are not betting that one sector will outperform. If you build your own portfolio of individual REITs, owning at least two or three different types reduces the risk that one sector's downturn hurts your whole position.

How to evaluate a REIT before buying

If you are considering an individual REIT, look at a few key metrics. Funds from Operations (FFO) is the REIT equivalent of earnings per share for a regular company — it tells you how much cash the REIT generated from its properties after paying operating costs. Compare FFO to the stock price to see if the REIT is cheap or expensive relative to its cash generation.

Dividend yield tells you what percentage return you will receive as a dividend each year. A REIT yielding 4 percent will pay you 4 percent of your investment annually as a dividend. Higher yield can mean the stock is cheap, or it can mean the REIT is in trouble and the market is pricing in a dividend cut. Compare the yield to the REIT's historical average and to other REITs in the same sector.

Debt-to-equity ratio shows how much the REIT borrowed relative to the value of its assets. REITs use debt to finance property purchases, so some leverage is normal. A ratio above 1.0 means the REIT owes more than the value of its equity, which increases risk if property values fall or interest rates rise sharply.

Read the REIT's annual report (called a 10-K) to understand what properties it owns, where they are located, and whether tenants are paying rent on time. The report is filed with the SEC and available free on the SEC's EDGAR database or on the REIT's investor relations website. You do not need to read the whole thing — focus on the property portfolio section and the management discussion of recent performance.

Tax-advantaged accounts and REIT ownership

Because REIT dividends are taxed as ordinary income, holding REITs in a tax-advantaged account can save you significant money. In a traditional IRA or 401(k), dividends are not taxed until you withdraw money in retirement. In a Roth IRA, dividends are never taxed if you follow the withdrawal rules.

If you have access to a 401(k) through your employer, check whether it offers a REIT fund or individual REITs as an investment option. Many do. If not, you can hold REITs in an IRA — either a traditional IRA or a Roth IRA — as long as you have earned income to contribute. Annual contribution limits are $7,000 for people under 50 and $8,000 for people 50 and older (as of 2024, though these limits change).

If you have maxed out your IRA and 401(k) contributions and still want to own more REITs, a taxable brokerage account is your next option. In a taxable account, you will owe taxes on dividends each year, but you can hold as much as you want with no contribution limits.

Getting started: a simple first step

If you are new to REITs, the simplest first step is to buy shares of a broad REIT index fund in a tax-advantaged account. Vanguard Real Estate ETF (VNQ) or iShares U.S. Real Estate ETF (IYR) each hold hundreds of REITs across all property types, charge low fees, and require no research beyond deciding how much to invest.

Open a brokerage account if you do not have one — most major brokers offer free accounts with no minimum balance. Link a bank account, deposit money, search for VNQ or IYR by ticker symbol, and place a buy order for the number of shares you can afford. The order will settle in two business days, and you will own a diversified slice of the real estate market.

As you learn more about how REITs work and which property types interest you, you can add individual REITs to your portfolio. But starting with a fund is a low-risk way to own real estate without the complexity of picking individual properties or managers.

Frequently Asked Questions

Can I hold REITs in a Roth IRA?

Yes. Roth IRAs allow you to hold stocks, funds, and REITs. Dividends and price appreciation inside a Roth are never taxed if you follow the withdrawal rules — you must be 59½ and have held the account for at least five years to withdraw earnings tax-free. This makes a Roth especially valuable for REIT dividends, which are taxed as ordinary income in a taxable account.

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

If a REIT goes bankrupt, shareholders are last in line to recover anything — creditors and bondholders are paid first. You could lose your entire investment. This is why diversification matters: owning a REIT fund with hundreds of holdings means one REIT's failure does not wipe out your portfolio. Owning just one or two individual REITs concentrates that risk.

Do I need to report REIT dividends on my taxes?

Yes, if you hold REITs in a taxable account. Your broker will send you a 1099 form showing the dividends you received, and you report that income on your tax return. If you hold REITs in a traditional IRA or 401(k), you do not report the dividends until you withdraw money. In a Roth, you do not report them at all if you follow the withdrawal rules.

Can I buy a REIT through my employer's 401(k)?

Many 401(k) plans offer REIT funds as an investment option, though not all do. Check your plan's investment menu or ask your plan administrator. If your plan does not offer REITs, you can hold them in an IRA instead, which gives you more investment choices than most 401(k)s.

What is the difference between a REIT ETF and a REIT mutual fund?

Both hold many REITs and charge low fees. The main difference is that ETFs trade like stocks during market hours, so you can buy and sell at any time the market is open. Mutual funds trade once per day after the market closes. ETFs typically have slightly lower expense ratios. For most investors, either works, but ETFs offer more flexibility if you need to sell quickly.