A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. By investing in a REIT, you gain exposure to real estate returns — rental income and property appreciation — without buying, managing, or financing any property yourself. REITs trade on stock exchanges just like company shares, making them one of the most accessible ways for ordinary investors to add real estate to their portfolios.
How REITs Work
To qualify as a REIT, a company must meet specific IRS requirements:
- At least 75% of total assets must be in real estate, cash, or U.S. Treasuries
- At least 75% of gross income must come from real estate sources (rent, mortgage interest)
- At least 90% of taxable income must be distributed to shareholders as dividends each year
- At least 100 shareholders must own shares
- No more than 50% of shares can be held by five or fewer individuals
The 90% distribution requirement is why REITs typically pay high dividend yields — they are required by law to pass most of their income through to investors. In exchange, REITs pay no corporate income tax, which avoids the double taxation that applies to regular corporations.
Types of REITs
- Equity REITs — Own and operate properties. Rent from tenants is the primary income source. This is the most common type. Subtypes include office, retail, industrial, residential, healthcare, and specialty (data centers, cell towers, self-storage).
- Mortgage REITs (mREITs) — Lend money to real estate owners or purchase existing mortgages and mortgage-backed securities. Income comes from interest, not rent. More sensitive to interest rate changes than equity REITs.
- Hybrid REITs — Hold both properties and mortgages. Relatively uncommon.
Publicly Traded vs. Non-Traded REITs
- Publicly traded REITs are listed on major stock exchanges (NYSE, Nasdaq). You can buy and sell shares at market prices through any brokerage account. Highly liquid. This is what most investors mean when they say “REIT.”
- Non-traded REITs are registered with the SEC but not listed on exchanges. They are sold through brokers, typically with high minimum investments and substantial fees (often 7–15% upfront commissions). Illiquid for years. Generally not recommended for most retail investors due to the fee structure and lack of price transparency.
- Private REITs are not registered with the SEC and are only available to accredited investors.
How to Invest in Publicly Traded REITs
You can invest in REITs through:
- Individual REIT stocks — Buy shares of specific REITs through your brokerage account just like any stock. Examples: Prologis (industrial), American Tower (cell towers), Realty Income (retail), Welltower (senior housing).
- REIT ETFs — Diversified funds that hold dozens of REITs. Vanguard Real Estate ETF (VNQ), Schwab U.S. REIT ETF (SCHH), and iShares U.S. Real Estate ETF (IYR) are the most popular. Expense ratios are low (0.08–0.40%).
- REIT mutual funds — Similar to ETFs but actively managed and purchased at end-of-day NAV. Higher fees than ETF equivalents.
REIT Dividend Taxes
REIT dividends are taxed differently from qualified stock dividends. Most REIT dividends are classified as ordinary income (taxed at your regular income tax rate), not qualified dividends (which receive the lower 15% rate). One exception: under the Tax Cuts and Jobs Act, REIT dividends qualify for the 20% pass-through deduction (Section 199A), which effectively reduces the tax rate on REIT dividends by 20% of the dividend amount for eligible taxpayers.
For this reason, REITs are often better held in tax-advantaged accounts (IRAs, 401(k)s) where the dividend tax treatment is irrelevant — distributions compound tax-deferred or tax-free.
Key Metrics for Evaluating REITs
- Funds From Operations (FFO): The REIT equivalent of earnings per share. Adds depreciation back to net income because real estate depreciation is a non-cash charge that distorts profitability. Look at FFO instead of net income when evaluating REIT value.
- Adjusted FFO (AFFO): FFO minus maintenance capital expenditures — a closer proxy for sustainable dividend capacity.
- Dividend yield: Annual dividend divided by current share price. Higher is not always better — check whether the payout ratio is sustainable.
- Occupancy rate: For equity REITs, the percentage of rentable space occupied. Higher occupancy generally means more stable income.
- Debt-to-equity ratio: REITs typically carry significant debt. Compare to peers in the same sector.
Bottom Line
REITs are one of the most accessible ways to add real estate exposure to a diversified portfolio. For most investors, a broad REIT ETF in a tax-advantaged account is the simplest approach. If you want sector-specific exposure — data centers, industrial logistics, healthcare — individual REIT stocks allow targeted bets. Avoid non-traded REITs due to their fee structure and illiquidity unless you have a specific reason and understand the risks.