Real estate investing doesn’t require a down payment, a landlord license, or a call from a tenant at midnight. Real Estate Investment Trusts — REITs — let you own a share of income-producing real estate through your regular brokerage account, the same way you’d buy a stock. Here’s how they work and how to evaluate them in 2026.
Related: What Is the Alternative Minimum Tax (AMT)?
What Is a REIT?
A Real Estate Investment Trust (REIT) 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 is why they’re known for relatively high dividend yields. In exchange for this distribution requirement, REITs pay no corporate income tax.
REITs own a wide range of property types: apartment complexes, office buildings, shopping centers, data centers, cell towers, hospitals, warehouses, and more. When you buy a REIT, you’re buying a fractional ownership stake in a real estate portfolio managed by professionals.
Types of REITs
- Equity REITs: Own and operate physical properties, generating revenue primarily from rent. This is the most common type. Examples include Prologis (warehouses), Realty Income (retail), and AvalonBay (apartments).
- Mortgage REITs (mREITs): Lend money to real estate owners or purchase mortgage-backed securities. Higher risk and more sensitive to interest rate changes.
- Hybrid REITs: Combine elements of both equity and mortgage REITs.
- Public non-traded REITs: Registered with the SEC but not listed on a stock exchange. Less liquid, harder to exit.
- Private REITs: Not registered with the SEC. Generally available only to accredited investors.
How to Buy REITs
The easiest way to invest in REITs is through publicly traded REITs or REIT ETFs, available through any brokerage account:
- Individual REITs: Buy shares of specific REITs (e.g., O, VNQ, AMT) on any exchange. Requires research to evaluate individual companies.
- REIT ETFs: Diversified baskets of REITs in a single fund. The Vanguard Real Estate ETF (VNQ) holds 150+ REITs and charges 0.13% expense ratio. Ideal for investors who want broad exposure without picking individual names.
- REIT mutual funds: Similar to ETFs but priced once daily. Available in many 401(k) plans.
How REITs Generate Returns
REITs return money to investors in two ways:
- Dividends: Because REITs must distribute 90% of taxable income, dividend yields are typically 3-6% — higher than most stocks. These are ordinary income (not qualified dividends), so they’re taxed at your regular income rate unless held in a tax-advantaged account.
- Share price appreciation: As the underlying real estate portfolio grows in value or generates higher rents, REIT share prices tend to rise over time.
Tax Considerations for REIT Investors
REIT dividends are mostly taxed as ordinary income, which is less favorable than the qualified dividend rate most stock dividends receive. The Tax Cuts and Jobs Act created a 20% pass-through deduction (Section 199A) that reduces the effective tax rate on REIT dividends for eligible investors.
The most tax-efficient way to hold REITs is inside a tax-advantaged account (traditional IRA, Roth IRA, or 401(k)), where dividends aren’t taxed until withdrawal (or never, in the case of a Roth).
REIT Performance vs. Stocks and Bonds
Historically, REITs have delivered returns comparable to the broader stock market over long periods — the FTSE NAREIT All REITs Index has averaged around 9-11% annually since 1972. They also provide diversification benefits because real estate values don’t move in perfect lockstep with equities.
REITs tend to underperform in rising interest rate environments (because higher rates increase borrowing costs and make REIT dividends less competitive) and outperform when rates fall.
How Much to Allocate to REITs
Most target-date funds include a small REIT allocation (5-10%). Financial planners often suggest a similar range — enough to capture diversification benefits without concentration risk. REITs should complement, not replace, your core stock index fund exposure.