What is a REIT?
A REIT (Real Estate Investment Trust) is a company that owns and operates income-producing real estate, structured so that investors can buy shares and receive a portion of the rental income — without buying or managing property themselves.
A REIT (Real Estate Investment Trust) is a company that owns, operates, or finances income-producing real estate. By law, REITs must distribute at least 90% of their taxable income to shareholders as dividends — which makes them attractive for income-focused investors. In exchange for this payout requirement, REITs are not taxed at the corporate level.
REITs make real estate investing accessible to anyone. Instead of buying a rental property, you can buy shares of a REIT on a stock exchange and receive a proportional share of the income generated by the underlying properties.
Types of REITs
By Asset Type
| REIT Type | What It Owns |
|---|---|
| Residential | Apartment complexes, single-family rentals, student housing |
| Office | Office buildings and business parks |
| Retail | Shopping malls, strip centers, freestanding retail |
| Industrial | Warehouses, distribution centers, logistics facilities |
| Healthcare | Hospitals, senior housing, medical office buildings |
| Data Centers | Server facilities and colocation centers |
| Infrastructure | Cell towers, fiber networks, energy pipelines |
| Mortgage REITs (mREITs) | Mortgages and mortgage-backed securities, not physical property |
By Structure
- Equity REITs — Own and operate physical properties; revenue comes from rent. The most common type.
- Mortgage REITs (mREITs) — Lend money to real estate owners or buy mortgage-backed securities; revenue comes from interest. Higher yield, but more sensitive to interest rate changes.
- Hybrid REITs — A combination of both equity and mortgage exposure.
How REITs Are Taxed
REIT dividends have a unique tax treatment that investors should understand:
- Most REIT dividends are classified as ordinary income (not qualified dividends), meaning they're taxed at your regular income tax rate — not the lower 15–20% qualified dividend rate
- However, thanks to the 20% pass-through deduction (Section 199A), individual investors can deduct up to 20% of REIT dividend income, reducing the effective tax rate
- REIT dividends inside an IRA or 401(k) grow tax-deferred or tax-free, making those accounts a natural home for REITs
Capital gains from selling REIT shares are taxed like other stock sales — at long-term or short-term rates depending on how long you held them.
REIT Dividends and Yield
Because REITs must distribute 90% of taxable income, they tend to offer higher dividend yields than most stocks. REIT yields commonly range from 3% to 8%+, depending on the type and market conditions.
However, a high yield alone doesn't make a REIT a good investment. Watch for:
- Funds from operations (FFO) — The standard REIT profitability metric (earnings adjusted for depreciation and gains from property sales); a better measure than net income
- Debt levels — REITs carry significant debt; interest rate increases can compress margins
- Occupancy rates — Higher occupancy means more stable income
REITs vs. Buying Property Directly
| REITs | Direct Real Estate | |
|---|---|---|
| Liquidity | High (sell shares any day) | Low (months to sell) |
| Minimum investment | Low (price of one share) | High (down payment, closing costs) |
| Management required | None | Significant |
| Diversification | Automatic (dozens of properties) | Concentrated |
| Leverage control | Limited | Full control |
| Tax benefits | Moderate | Significant (depreciation, 1031 exchange) |
REITs in a Portfolio
REITs are often recommended as a diversification tool because real estate has historically had a relatively low correlation with stocks and bonds — meaning it doesn't always move in the same direction. REITs also provide inflation protection, since rents tend to rise with inflation over time.
Most target-date funds and broad market index funds include some REIT exposure automatically. Investors who want more concentrated real estate exposure can add a dedicated REIT fund or individual REIT shares.