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 buildings, land, or mortgages and pays most of its profits to shareholders as dividends. You buy shares in the REIT the same way you buy shares in any other company — through a brokerage account — and you own a piece of the real estate portfolio without having to buy property yourself, manage tenants, or handle repairs.

The structure exists because of a federal rule: if a REIT distributes at least 90 percent of its taxable income to shareholders each year, it pays no corporate income tax. That requirement is why REITs tend to pay higher dividends than stocks. The company keeps the remaining 10 percent and uses it to maintain properties, pay debt, or grow the portfolio.

REITs hold different types of real estate. Some own apartment buildings or single-family homes. Others own office parks, shopping centers, warehouses, data centers, hospitals, or hotels. A few own mortgages instead of properties themselves. You can buy shares in a single REIT or own several, just as you would with stocks.

Key Takeaways

• A REIT is a company that owns real estate or mortgages and must distribute 90 percent of its profits to shareholders as dividends each year.
• You buy REIT shares through a brokerage account the same way you buy stock, and the share price can rise or fall based on market demand.
• REITs typically pay higher dividends than most stocks because of their tax structure, but those dividends are taxed as ordinary income, not at the lower capital gains rate.
• Different REITs own different types of property — apartments, offices, warehouses, hospitals, hotels — so you can choose based on what sectors interest you.
• REIT share prices move with the real estate market and interest rates, so they can be volatile even though the underlying properties are stable.

How REIT dividends work and what you owe in taxes

When a REIT collects rent or mortgage payments from its tenants, it must pass most of that money to shareholders. That payout is called a dividend, and it usually arrives quarterly. The amount per share depends on how much profit the REIT made and how many shares are outstanding.

REIT dividends are taxed as ordinary income, not as may have access to dividends. That means if you hold a REIT in a regular taxable brokerage account, you pay your full income tax rate on the dividend, not the lower capital gains rate that applies to many stock dividends. If you hold a REIT in a retirement account like an IRA or 401(k), you owe no tax on the dividend until you withdraw money from the account.

The dividend is separate from any gain or loss when you sell the shares. If you buy a REIT share for $50 and sell it for $60, you have a $10 capital gain, which is taxed at the capital gains rate. The dividends you received along the way are taxed as ordinary income. This tax treatment is one reason some investors prefer to hold REITs in retirement accounts.

Why REIT share prices move, and how that differs from owning property

A REIT share price rises and falls based on what other investors are willing to pay for it on the stock exchange. That price depends on the REIT's earnings, the dividends it pays, the quality of its properties, and broader market conditions — especially interest rates.

When interest rates rise, REITs often fall in price because investors can earn higher returns in bonds or savings accounts, making REIT dividends less attractive by comparison. When interest rates fall, REIT prices often rise. This sensitivity to rates is one way REITs differ from owning a rental property outright: a property's value may not move as quickly or as visibly, but a REIT share price changes every trading day.

This daily price movement creates both opportunity and risk. You can buy a REIT share when its price is low and sell when it rises, capturing a gain. You can also lose money if the price falls. Unlike a rental property, you cannot control the timing of when you sell — you can exit whenever the market is open, but you cannot negotiate the price.

The difference between public REITs, private REITs, and non-traded REITs

A public REIT trades on a stock exchange like the New York Stock Exchange or NASDAQ. You can buy and sell shares instantly during market hours through any brokerage account. Public REITs are regulated by the Securities and Exchange Commission and must file regular financial reports. Examples include Realty Income, Prologis, and Welltower.

A private REIT does not trade on an exchange. It is offered to accredited investors — typically those with high net worth or income — and shares are harder to buy and sell. Private REITs often have higher minimum investments and longer lock-up periods, meaning you cannot withdraw your money for a set number of years.

A non-traded REIT sits between the two. It is registered with the SEC but does not trade on an exchange. These REITs are sold through financial advisors and brokers, often with sales commissions built in. They tend to have high fees and limited liquidity — you may have to wait months or years to sell your shares, and you may receive less than you paid.

How to buy REIT shares and what costs to expect

To buy shares in a public REIT, open a brokerage account with a firm like Fidelity, Vanguard, Charles Schwab, or any other broker. Search for the REIT by name or ticker symbol, place an order for the number of shares you want, and the trade settles in two business days. You pay the market price at the time of purchase, plus any commission your broker charges (most brokers charge no commission for stock trades, including REIT shares).

You can also buy REIT shares through a mutual fund or exchange-traded fund (ETF) that holds multiple REITs. This approach gives you instant diversification across different property types and REIT companies. An ETF that tracks REIT indexes, like VNQ or SCHH, charges a small annual fee (often 0.1 percent or less) and holds dozens of REITs in a single fund.

Private and non-traded REITs typically require a minimum investment of $1,000 to $25,000 or more, and they charge annual fees ranging from 1 to 2 percent or higher. These fees cover management, acquisition costs, and sales commissions. Before investing in a non-traded REIT, read the prospectus carefully and understand how long your money will be locked up.

REITs versus rental property ownership

Owning REIT shares and owning a rental property both expose you to real estate, but the experience is very different. With a REIT, you own a small piece of many properties managed by professionals. You receive dividends but have no control over which properties the REIT buys, how they are maintained, or when they are sold. Your return depends entirely on the REIT's performance and the share price.

With a rental property, you control everything: which property to buy, how to renovate it, what rent to charge, and when to sell. You can use leverage (a mortgage) to amplify your returns. You also handle all the work: finding tenants, collecting rent, fixing problems, and paying property taxes. The property does not trade daily, so you do not see the price fluctuate, but you also cannot exit quickly if you need cash.

REITs offer liquidity, diversification, and professional management. Rental properties offer control and the ability to use leverage. Many investors own both: REITs in their portfolio for diversification and income, and one or two rental properties for hands-on real estate exposure.

How interest rates and the economy affect REIT performance

REITs are sensitive to interest rates because they borrow money to buy properties. When rates rise, borrowing costs more, which reduces REIT profits. At the same time, higher rates make bonds and savings accounts more attractive, so investors may sell REIT shares to chase higher yields elsewhere. Both effects push REIT prices down.

Economic recessions also hurt REITs. When unemployment rises and consumer spending falls, retail tenants may struggle to pay rent or go out of business. Office REITs suffered when remote work became common after 2020. Apartment REITs, by contrast, tend to hold up better because people always need housing. The type of property a REIT owns matters enormously during downturns.

Inflation can help or hurt REITs depending on the lease structure. If a REIT's leases include rent increases tied to inflation, rising prices boost income. If leases are fixed-rate, inflation erodes the REIT's purchasing power. Long-term, REITs have historically kept pace with inflation because real estate values and rents tend to rise over time.

Frequently Asked Questions

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

No. You can buy a single share of a public REIT for the market price of that share, which might be $50 to $150. You can also buy REIT ETFs with as little as the price of one share. Private and non-traded REITs typically require $1,000 to $25,000 minimums, but public REITs have no minimum.

Can I lose money in a REIT?

Yes. REIT share prices fall when interest rates rise, when the economy weakens, or when the REIT's properties underperform. You can also lose money if you sell shares for less than you paid. The dividend does not protect you from price declines, though it does provide income along the way.

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

Retirement accounts are often better because REIT dividends are taxed as ordinary income. In an IRA or 401(k), you owe no tax on the dividend until you withdraw. In a taxable account, you pay full income tax on the dividend each year, which can be a significant drag on returns over time.

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

A REIT is a company that owns real estate. A real estate mutual fund or ETF is a fund that owns shares in multiple REITs or real estate companies. The fund gives you diversification across many REITs in one purchase, while buying a single REIT concentrates your bet on that company's properties and management.

Can REITs go bankrupt?

Yes, though it is uncommon. A REIT can fail if its properties lose value, tenants stop paying rent, or debt becomes unmanageable. During the 2008 financial crisis, several REITs struggled or failed. Diversifying across multiple REITs or holding a REIT ETF reduces the risk that any single REIT's failure will hurt your portfolio.