How REITs Work and Why Investors Own Them

What a REIT is and how it works

A REIT (Real Estate Investment Trust) is a company that owns and operates income-producing real estate — office buildings, apartments, shopping centers, warehouses, hotels, or data centers. Instead of buying property yourself, you buy shares in the REIT, and the company pays you a portion of the income the properties generate.

REITs must follow specific rules set by the IRS. The most important one: they have to distribute at least 90 percent of their taxable income to shareholders as dividends each year. That is why REITs typically pay higher dividends than stocks. In exchange for that requirement, REITs do not pay corporate income tax — the tax burden passes to you as a shareholder instead.

You buy and sell REIT shares the same way you buy and sell stocks: through a brokerage account, during market hours, at whatever price the market is trading them for that day. Some REITs are publicly traded (listed on an exchange like the NYSE); others are private and sold only to institutional investors or accredited individuals.

Key Takeaways

• A REIT owns real estate and distributes at least 90 percent of its income to shareholders as dividends, which is why REIT dividends tend to be higher than stock dividends.
• Publicly traded REITs trade like stocks during market hours and let you own a piece of real estate without buying property or managing tenants.
• REIT dividends are taxed as ordinary income, not as capital gains, so they can create a larger tax bill than stock dividends in a taxable account.
• REITs give you exposure to specific property types — apartments, offices, warehouses, data centers — so you can target the real estate sectors you want to own.
• A REIT's share price moves with market sentiment and interest rates, not just with the value of the properties it owns.

Why investors own REITs

Most investors own REITs for the income. Because REITs must distribute 90 percent of taxable income, they typically yield 3 to 6 percent or more — higher than the dividend yield on most stocks or bonds. If you need regular cash flow from your portfolio, REITs can provide it.

REITs also let you own real estate without the work of being a landlord. You do not have to find tenants, collect rent, fix a leaky roof, or deal with evictions. The REIT's management team handles all of that. You simply own shares and receive dividends.

A third reason is diversification. Real estate does not move in lockstep with stocks and bonds. When stock prices fall, real estate values and rents sometimes hold steady or even rise. Adding REITs to a portfolio that is mostly stocks and bonds can reduce overall volatility.

Types of REITs and what they own

REITs specialize in different property types, so you can choose which real estate sectors you want to own. An apartment REIT owns residential rental buildings. An office REIT owns commercial office space. A retail REIT owns shopping centers and malls. A industrial REIT owns warehouses and logistics facilities. A data center REIT owns the buildings that house servers and networking equipment.

Other REITs own hotels, healthcare facilities (nursing homes, medical offices), self-storage units, cell phone towers, or a mix of property types. Some REITs focus on a single city or region; others own properties across the country or internationally.

The property type matters because different sectors respond differently to economic conditions. Apartment REITs tend to do well when the economy is weak and people cannot afford to buy homes. Office REITs have faced headwinds since remote work became common. Industrial and data center REITs have benefited from e-commerce and cloud computing growth.

How REIT dividends are taxed

REIT dividends are taxed as ordinary income, not as capital gains. That means they are taxed at your regular income tax rate — potentially as high as 37 percent at the federal level, depending on your income bracket. By contrast, may have access to stock dividends are taxed at lower capital gains rates (0, 15, or 20 percent).

This tax treatment makes a big difference in a taxable brokerage account. A REIT yielding 5 percent might leave you with only 3 percent after taxes if you are in a high tax bracket. The same yield from a stock would leave you with more after taxes.

In a tax-deferred account like a 401(k) or traditional IRA, you do not pay taxes on REIT dividends until you withdraw money. In a Roth IRA, you never pay taxes on REIT dividends. For that reason, many investors hold REITs in retirement accounts and keep stocks in taxable accounts.

REIT share prices and interest rates

A REIT's share price is not determined solely by the value of the properties it owns. It also moves with interest rates and investor sentiment. When interest rates rise, REIT prices often fall because investors can get higher yields from bonds, making REITs less attractive. When interest rates fall, REIT prices often rise.

This interest-rate sensitivity is one reason REITs can be volatile. A REIT that owns solid, income-producing properties might still lose 20 or 30 percent of its value in a year if interest rates spike and investors flee to bonds. Conversely, falling interest rates can push REIT prices up even if the underlying properties are not appreciating.

The market also prices in expectations about economic growth, inflation, and the health of specific property sectors. An office REIT might fall if investors worry about long-term remote work trends, even if current occupancy is stable.

Publicly traded vs. private REITs

A publicly traded REIT is listed on a stock exchange and trades during market hours like any stock. You can buy and sell shares instantly at the market price. These REITs must file regular financial reports with the SEC and meet strict disclosure requirements. Most individual investors own publicly traded REITs because they are easy to buy and transparent.

A private REIT is not listed on an exchange. It is sold directly to investors, usually through a broker or financial advisor, and you cannot easily sell your shares. Private REITs often have higher minimum investments (sometimes $25,000 or more) and charge higher fees. They also report less frequently and are less regulated than public REITs. Private REITs may appeal to wealthy investors seeking specific real estate exposure, but they are less liquid and riskier for most people.

How to own REITs in your portfolio

You can own individual REIT shares by buying them through a brokerage account, just as you would buy individual stocks. You can also own REITs through a mutual fund or ETF that holds multiple REITs. A REIT mutual fund or ETF spreads your money across many properties and companies, reducing the risk that any single REIT performs poorly.

Many target-date funds and balanced funds include a small allocation to REITs (typically 5 to 15 percent of the portfolio). If you already own a diversified fund, you may already own REITs without realizing it. Check your fund's holdings to see what percentage is in real estate.

If you want to add REITs to your portfolio, decide first whether you want exposure to a specific property type (apartments, offices, warehouses) or a mix. Then decide whether you prefer individual REITs, a REIT mutual fund, or a REIT ETF. Individual REITs give you more control but require more research. Funds give you instant diversification but charge fees.

Frequently Asked Questions

Do I need a lot of money to invest in REITs?

No. You can buy a single share of a publicly traded REIT for whatever the share price is — often $50 to $150 per share. If you want to own multiple REITs, a REIT ETF or mutual fund may be cheaper because you can invest a smaller amount and own dozens of REITs at once.

Can I lose money in a REIT?

Yes. REIT share prices fluctuate based on interest rates, economic conditions, and the performance of the properties they own. You can buy a REIT at $100 per share and sell it at $70 per share, locking in a loss. The high dividend does not protect you from price declines.

Are REITs safer than stocks?

Not necessarily. REITs are less volatile than some stocks but more volatile than bonds. Real estate is a tangible asset, which appeals to some investors, but REIT prices are still driven by market sentiment and interest rates. They are a different asset class, not a safer one.

Should I hold REITs in a retirement account or a taxable account?

If you have a choice, hold REITs in a retirement account (401(k), IRA, Roth IRA) because REIT dividends are taxed as ordinary income. In a retirement account, you avoid that tax hit. Keep stocks in taxable accounts where their lower capital gains tax rates work in your favor.

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

A REIT is a company that owns and operates real estate. A real estate mutual fund is a fund that owns shares in multiple REITs or real estate companies. A real estate fund gives you diversification across many REITs and property types in a single purchase.