How to Find REITs That Match Your Investment Goals

The best REIT for you depends on what you own, how much income you need, and how much risk you can handle

There is no single "best" REIT because different REITs own different things — apartment buildings, shopping centers, data centers, hospitals — and perform differently depending on economic conditions. A REIT that pays high income might be riskier. A REIT focused on growth might pay little dividend. The right choice is the one that fits your portfolio and your situation, not the one with the highest current yield or the most impressive name.

Most individual investors choose REITs through one of three routes: buying shares of a publicly traded REIT on a stock exchange (like buying any stock), buying a REIT mutual fund or ETF that holds many REITs at once, or buying into a non-traded REIT sold through a financial advisor. Each route has different costs, liquidity, and transparency. Before you decide which REIT to buy, you need to decide which route makes sense for you.

Key Takeaways

• Publicly traded REITs trade on stock exchanges like stocks and let you buy one property type at a time, but REIT ETFs and mutual funds spread your money across many REITs and property types with a single purchase.
• A REIT's dividend yield (the annual payout divided by the share price) varies with market conditions and does not predict future returns, so comparing yields alone can lead you to buy at the wrong time.
• REITs that own apartments or industrial warehouses have performed differently from those that own office buildings or shopping centers, so your choice of property type matters more than picking a specific company.
• Non-traded REITs sold by advisors charge high upfront fees and lock your money in for years, making them unsuitable for most individual investors building a portfolio.
• A REIT mutual fund or ETF is usually simpler and cheaper than picking individual REITs, especially if you are starting with a small amount of money.

Publicly traded REITs versus REIT funds

A publicly traded REIT is a company that owns real estate and trades on a stock exchange — you buy and sell shares the same way you would buy Apple or Microsoft. Examples include Realty Income (ticker: O), which owns single-family homes and commercial properties, and Prologis (ticker: PLD), which owns industrial warehouses. You can buy one share or one hundred shares, and you own a piece of that specific company's properties.

A REIT mutual fund or ETF is a fund that holds shares of many different REITs. Vanguard Real Estate ETF (VNQ) holds over 150 REITs in one fund. When you buy one share of VNQ, you own a tiny piece of dozens of different property types and companies. The fund manager rebalances the holdings, so you do not have to pick individual REITs yourself.

For most investors, a REIT fund is simpler and cheaper. You get instant diversification — if one REIT performs poorly, it is a small part of your fund. You pay one expense ratio (usually 0.1% to 0.4% per year for an ETF) instead of paying a commission each time you buy a different REIT. And you do not have to research individual companies. The tradeoff is that you own a piece of everything in the fund, including property types you might not want.

Picking individual publicly traded REITs makes sense if you have strong views about a specific property type — for example, if you believe industrial warehouses will outperform apartments — or if you want to own a concentrated position in one company. It requires more research and more trading, and you bear the risk that one company underperforms.

How property type affects REIT performance

REITs that own different kinds of real estate have performed very differently over the past decade. Industrial REITs (warehouses, logistics centers) have generally outperformed retail REITs (shopping centers, malls) because e-commerce drove demand for warehouse space while traditional retail struggled. Apartment REITs benefited from housing shortages in many cities. Office REITs have faced headwinds as remote work reduced demand for office space.

If you buy an individual REIT, you are betting on that property type as much as on that specific company. Before you choose a REIT, ask yourself: do you think apartments will outperform offices? Do you believe data centers will grow faster than shopping centers? Your answer to these questions matters more than whether you pick Apartment REIT A or Apartment REIT B.

A diversified REIT fund owns all property types, so you do not have to make these bets. You own the market. This is useful if you do not have a strong view about which property type will win, or if you want to avoid the risk of being wrong about the future of office space or retail.

Dividend yield and when to buy

REITs are required by law to pay out at least 90% of their taxable income to shareholders as dividends. This is why REIT dividends are often higher than stock dividends. A REIT might pay 3% to 5% per year, while the overall stock market pays around 1.5% to 2%.

The dividend yield is the annual dividend divided by the current share price. If a REIT pays $2 per share per year and the share price is $50, the yield is 4%. If the share price falls to $40, the yield rises to 5% — the dividend payment did not change, but the yield did because the price fell. This is important: a high yield can mean the REIT is a bargain, or it can mean the market is pricing in trouble ahead. Yield alone does not tell you which.

Comparing yields between REITs can mislead you into buying at the wrong time. If REIT A yields 3% and REIT B yields 5%, REIT B might be cheaper, or it might be riskier. You need to look at the company's debt, its occupancy rate (what percentage of its buildings are rented), and whether its tenants are stable. A REIT fund avoids this problem because the fund holds many REITs, so one high-yielding REIT is a small part of your position.

Non-traded REITs and why to avoid them

A non-traded REIT is a REIT that does not trade on a stock exchange. It is sold by financial advisors and brokers, usually to investors with high net worth. Examples include Inland Diversified Real Estate Trust and Behringer Harvard Opportunity REIT.

Non-traded REITs charge upfront fees of 10% to 15% — if you invest $100,000, $10,000 to $15,000 goes to the advisor and the REIT sponsor before your money buys any real estate. They also charge annual fees of 1% to 2%. And your money is locked in for years — you cannot sell your shares on a public market, so you have to wait for the REIT to be sold or liquidated, which can take 7 to 10 years or longer.

For a publicly traded REIT or a REIT ETF, you pay no upfront fee (or a small commission if you buy through a broker), you can sell anytime, and your annual costs are under 0.5%. Non-traded REITs make sense only if you have a specific property or deal that you cannot access any other way, and even then, the high fees are hard to justify. For building a diversified REIT portfolio, they are not the right tool.

Building a REIT portfolio that fits your goals

Start by deciding how much of your portfolio should be in real estate. Many financial advisors suggest 5% to 15% of a diversified portfolio, but this depends on your age, your other assets, and your income needs. If you own a home, you already own real estate, so you might want less in REITs. If you need high income and own few stocks that pay dividends, you might want more.

Next, decide whether you want a single diversified REIT fund or a mix of individual REITs focused on different property types. For most investors, a single REIT ETF like VNQ (Vanguard), SCHH (Schwab), or IYR (iShares) is the simplest choice. These funds hold 100 to 200 REITs and cost less than 0.1% per year. You buy once and rebalance as part of your overall portfolio.

If you want to tilt toward a specific property type — for example, industrial warehouses or apartments — you can buy a focused REIT ETF in addition to or instead of a broad fund. Vanguard offers separate ETFs for apartments (VNQ), industrial (VNQ), and other categories. This lets you express a view without picking individual companies.

If you do pick individual REITs, treat them the way you would treat individual stocks: research the company's debt, occupancy, tenant quality, and management before you buy. Do not buy based on yield alone. And do not buy so many that you cannot keep track of them — five to ten individual REITs is usually enough to diversify within the category.

Where to research and buy REITs

Most brokers let you buy publicly traded REITs and REIT ETFs with no commission. Fidelity, Schwab, Vanguard, and E-Trade all offer this. You can also buy through a robo-advisor like Betterment or Wealthfront, which will build a diversified portfolio including REITs based on your goals and risk tolerance.

To research individual REITs, start with the company's investor relations website — every public REIT publishes quarterly earnings reports and annual reports that explain what they own, how much debt they carry, and what their tenants pay. The National Association of Real Estate Investment Trusts (NAREIT) publishes data on REIT performance by property type. Financial websites like Morningstar and Yahoo Finance let you compare REIT yields, expense ratios, and holdings.

For REIT ETFs, Morningstar and the fund company's website show you exactly which REITs are in the fund, what the expense ratio is, and how the fund has performed. This transparency makes it easier to understand what you own and why.

Frequently Asked Questions

Should I buy a REIT ETF or pick individual REITs?

A REIT ETF is simpler and cheaper for most investors. You get diversification across property types and companies with a single purchase and low annual costs. Pick individual REITs only if you have a strong view about a specific property type or company and are willing to research and monitor them.

What is a good dividend yield for a REIT?

REIT yields vary with interest rates and market conditions. A yield of 3% to 5% is typical for a stable REIT, but yield alone does not tell you if a REIT is a good buy. A very high yield can signal that the market expects trouble ahead. Compare the yield to the REIT's debt level and occupancy rate before deciding.

Can I buy REITs in a retirement account like an IRA?

Yes. You can buy REIT shares, REIT ETFs, or REIT mutual funds inside a traditional IRA, Roth IRA, or 401(k). This is often a good place for REITs because REIT dividends are taxed as ordinary income, not capital gains, so holding them in a tax-deferred account can save you money on taxes.

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

A REIT owns real estate directly and pays out most of its income as dividends. A real estate mutual fund is a fund that holds REIT shares and other real estate investments. A REIT fund (which holds REITs) is different from a REIT (which owns buildings). Most individual investors buy REIT funds, not individual REITs.

Do REITs perform better than the overall stock market?

REITs have outperformed stocks in some periods and underperformed in others. Over the long term, REIT returns have been similar to stock returns, but with different timing — REITs often do well when stocks struggle and vice versa. This is why holding both can reduce overall portfolio risk.