How to Start Investing in REITs

How to invest in a REIT

You buy shares of a REIT the same way you buy shares of any other company: through a brokerage account. Open an account with a broker (Fidelity, Vanguard, Charles Schwab, and E*TRADE are common choices), deposit money, search for the REIT by its ticker symbol, and place a buy order for the number of shares you want. The transaction settles in two business days, and you own the shares outright. You do not need special permission, a minimum investment amount, or a separate REIT account — a regular taxable brokerage account or an IRA works fine.

The main decision is whether to buy individual REIT shares, a REIT mutual fund, or a REIT exchange-traded fund (ETF). Individual shares let you pick specific properties or companies; funds and ETFs spread your money across many REITs at once, which reduces the risk that any single REIT performs poorly. Most beginning investors start with a fund or ETF because the diversification is automatic and the fees are usually lower than buying individual shares and paying a commission on each one.

Key Takeaways

• You buy REIT shares through any brokerage account using the same process as buying stock — no special account type or minimum is required.
• Individual REIT shares give you control over which properties you own, but REIT funds and ETFs spread risk across many REITs with lower fees.
• REITs must pay out at least 90 percent of their taxable income as dividends, so expect regular cash distributions but also higher tax bills in a taxable account.
• REIT prices move with interest rates — when rates rise, REIT share prices often fall because bonds become more attractive to investors.

Opening a brokerage account

Start by choosing a broker. Most brokers charge no commission to buy or sell stocks or ETFs, so the main differences are the research tools they offer, the user interface, and customer service quality. Fidelity, Vanguard, Charles Schwab, E*TRADE, and Interactive Brokers are all established firms; smaller brokers like Webull and M1 Finance also exist. Visit the broker's website, click "Open an Account," and provide your name, address, Social Security number, and employment information. The process takes 10 to 15 minutes online.

You will need to choose an account type. A taxable brokerage account has no contribution limits and no withdrawal restrictions — you can buy and sell whenever you want, but you pay income tax on dividends and capital gains. A traditional IRA or Roth IRA lets you hold REITs tax-sheltered, which is valuable because REIT dividends are taxed as ordinary income (at your full tax rate, not the lower capital gains rate). A 401(k) or other employer retirement plan may also offer REIT funds as an investment option. For most people, holding REITs in an IRA or 401(k) makes more sense than holding them in a taxable account, because the tax shelter offsets the high dividend distributions.

Individual REIT shares versus REIT funds and ETFs

Buying individual REIT shares means you pick one company — say, Realty Income (ticker: O) or Digital Realty (ticker: DLR) — and own a piece of that specific portfolio of properties. You control exactly what you own and can research the company's properties, management, and financial health before you buy. The downside is that one REIT's performance depends on its specific properties and markets; if that REIT struggles, your investment suffers. You also pay a commission on each trade if your broker charges one (most do not, but some do for certain account types).

A REIT mutual fund or REIT ETF pools your money with other investors and buys dozens or hundreds of REIT shares. Vanguard Real Estate ETF (VNQ) holds over 150 REITs; Schwab U.S. REIT ETF (SCHH) holds over 100. Because your money is spread across many companies and property types, one REIT's bad quarter does not sink your investment. The trade-off is that you own a piece of all of them, including the ones you might not have chosen yourself. ETFs and mutual funds charge an annual fee (called an expense ratio) — typically 0.1 to 0.4 percent per year for a broad REIT fund — but this is usually lower than the cost of buying individual shares and paying commissions on each one.

Most beginning investors choose a REIT ETF or mutual fund because the diversification is automatic and the fees are transparent and low. If you want to build a custom portfolio of specific REITs, individual shares make sense; if you want simplicity and broad exposure, a fund is the better choice.

Understanding REIT dividends and taxes

REITs are required by law to distribute at least 90 percent of their taxable income to shareholders as dividends. This means REIT investors receive regular cash payments — often quarterly — which is attractive if you want income from your investments. However, REIT dividends are taxed as ordinary income, not as capital gains. If you earn $50,000 a year and receive $2,000 in REIT dividends, you pay tax on $52,000 of income. This is a significant tax burden in a taxable brokerage account.

The solution is to hold REITs in a tax-sheltered account: a traditional IRA, Roth IRA, or 401(k). Inside these accounts, dividends are not taxed as you receive them, so you keep the full amount. When you withdraw money from a traditional IRA or 401(k), you pay tax on the withdrawal; when you withdraw from a Roth IRA, you pay no tax at all (assuming you follow the rules). This tax shelter is one of the main reasons financial advisors recommend holding REITs in retirement accounts rather than in regular brokerage accounts.

How REIT prices move with interest rates

REIT share prices are sensitive to interest rates because REITs compete with bonds for investor money. When the Federal Reserve raises interest rates, bonds become more attractive — they offer higher yields with less risk. Investors sell REIT shares and buy bonds instead, which pushes REIT prices down. When rates fall, the opposite happens: bonds become less attractive, investors buy REITs, and prices rise. This relationship is not perfect — a REIT with strong earnings growth can rise even when rates are rising — but it is consistent enough that REIT investors watch the Fed closely.

This interest-rate sensitivity matters for your timing and your expectations. If you believe rates will fall, REITs may be a good buy. If you believe rates will rise, you might wait or hold a smaller position. Over long periods, REITs have delivered solid returns through a mix of dividends and price appreciation, but in the short term, rate changes can cause sharp swings. This is another reason to hold REITs in a diversified portfolio rather than as your only investment.

Building a REIT position in your portfolio

Most financial advisors suggest REITs should make up 5 to 15 percent of a diversified portfolio, depending on your age and risk tolerance. A simple approach is to buy a broad REIT ETF like VNQ or SCHH and let it sit. A more active approach is to buy individual REITs in different sectors — residential (apartment buildings), commercial (office and retail), industrial (warehouses), healthcare (medical facilities), or specialty (data centers, cell towers). Sector diversification reduces the risk that a downturn in one property type hurts your whole position.

If you are investing through an employer 401(k), check whether a REIT fund is available as an option. If it is, you can allocate a portion of your contributions to it. If you are investing on your own, start with a REIT ETF in an IRA or taxable account, then add individual shares if you want more control. Dollar-cost averaging — investing a fixed amount each month rather than a lump sum — can reduce the risk of buying at the wrong time, especially if you are uncertain about the direction of interest rates.

Frequently Asked Questions

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

No. Most brokers let you buy a single share of a REIT or REIT ETF for the price of that share — often $50 to $150. You can start with $100 or $500 and add more over time. There is no minimum investment amount required by law or by most brokers.

Can I hold REITs in a Roth IRA?

Yes. A Roth IRA is an excellent place to hold REITs because dividends grow tax-free and you pay no tax on withdrawals in retirement. This shelters you from the high tax bill that REIT dividends create in a taxable account.

What happens if a REIT cuts its dividend?

The share price usually falls when a REIT announces a dividend cut, because investors buy REITs partly for the income. However, a dividend cut sometimes signals that management is preserving cash for a good reason — to buy new properties or weather a downturn. Research the reason before you sell.

Should I buy individual REITs or a REIT fund?

Start with a REIT fund or ETF if you want simplicity and automatic diversification. Buy individual REITs if you have time to research companies and want to build a custom portfolio. Most investors benefit from a mix: a core REIT ETF position plus a few individual shares in sectors you understand.

How often do REITs pay dividends?

Most REITs pay dividends quarterly, though some pay monthly or annually. Check the REIT's investor relations page or your broker's website to see the payment schedule before you buy.