Imagine earning money from office buildings, apartment complexes, shopping malls, and data centers—without ever unclogging a tenant’s drain or applying for a mortgage. That’s the promise of REITs, or Real Estate Investment Trusts.
For many investors, REITs offer an accessible, hands-off way to invest in real estate. Whether you’re looking for consistent dividends, portfolio diversification, or a hedge against inflation, REITs have become a popular option in both retirement and brokerage accounts.
But how do REITs really work? What makes them different from other stocks? And are they a smart choice for your investment strategy?
This guide breaks down everything you need to know about REITs—from the basics to advanced insights—so you can decide if they deserve a spot in your portfolio.
Contents
What Is a REIT?
A REIT (Real Estate Investment Trust) is a company that owns, operates, or finances income-producing real estate. REITs collect rent or lease payments and distribute most of the profits back to shareholders as dividends.
They were created by Congress in 1960 to give regular investors access to large-scale, income-generating real estate—without having to buy or manage properties themselves.
REITs are traded on major stock exchanges like regular stocks, meaning you can invest in real estate with as little as a few dollars and sell your shares at any time.
Key Features of REITs
-
High Dividend Yields: By law, REITs must distribute at least 90% of their taxable income to shareholders.
-
Liquidity: Unlike owning physical property, REITs can be bought and sold instantly on stock exchanges.
-
Diversification: Many REITs own hundreds of properties across cities or countries, spreading out risk.
-
Accessibility: You can start investing in REITs with almost no capital or real estate experience.
-
Tax Implications: Dividends are taxed as ordinary income, not at the lower qualified dividend rate (unless held in a tax-advantaged account).
How Do REITs Make Money?
REITs generate income primarily from:
-
Rent and Lease Payments: Collected from tenants in commercial, industrial, or residential properties.
-
Capital Appreciation: As property values increase, so does the underlying value of the REIT’s portfolio.
-
Property Sales or Refinancing: Occasionally, REITs sell properties at a profit or refinance them to access equity.
They then pay out the majority of this income as dividends to shareholders.
Types of REITs
1. Equity REITs (Most Common)
-
Own and manage income-producing properties.
-
Make money primarily through rent collection.
-
Examples: Residential, commercial, industrial, retail, self-storage, healthcare.
Popular Equity REITs:
-
Realty Income (O): Focused on retail and commercial leases.
-
Equinix (EQIX): Owns and operates data centers.
-
AvalonBay Communities (AVB): Specializes in high-end apartment complexes.
2. Mortgage REITs (mREITs)
-
Don’t own property—they invest in mortgages or mortgage-backed securities.
-
Make money from interest on these investments.
-
More sensitive to interest rates and economic cycles.
Examples:
-
Annaly Capital Management (NLY)
-
AGNC Investment Corp. (AGNC)
3. Hybrid REITs
-
Combine strategies from both equity and mortgage REITs.
-
Hold both real properties and mortgage assets.
REIT Sectors You Can Invest In
REITs are highly specialized. Here are some of the main sectors:
-
Residential: Apartments, student housing, manufactured homes.
-
Retail: Shopping centers, malls, standalone stores.
-
Office: Skyscrapers, corporate headquarters, coworking spaces.
-
Industrial: Warehouses, logistics hubs, fulfillment centers.
-
Healthcare: Hospitals, medical offices, senior living facilities.
-
Hospitality: Hotels, resorts.
-
Data Centers: Power-heavy facilities that store and process digital data.
-
Infrastructure: Cell towers, fiber optics, utility networks.
-
Self-Storage: Mini-warehouse facilities for personal or business use.
Each sector performs differently depending on the economy, interest rates, and consumer trends.
How to Invest in REITs
1. Publicly Traded REITs
These are listed on major stock exchanges and can be bought via:
-
Brokerage accounts (Fidelity, Vanguard, Robinhood, etc.)
-
Retirement accounts (IRA, 401(k))
Just like stocks, you can:
-
Research financials
-
Read earnings reports
-
Trade them any time the market is open
2. REIT Mutual Funds or ETFs
Instead of picking individual REITs, you can buy funds that track the entire REIT market.
Examples:
-
Vanguard Real Estate ETF (VNQ)
-
Schwab U.S. REIT ETF (SCHH)
-
iShares U.S. Real Estate ETF (IYR)
These offer instant diversification and are great for passive investors.
3. Private or Non-Traded REITs
Offered by investment firms and not publicly traded. These may offer higher yields but come with:
-
Less liquidity
-
Higher fees
-
Less transparency
Only recommended for accredited or experienced investors.
Pros of REIT Investing
-
Steady Income: REITs are known for reliable, high-yield dividends—ideal for income investors or retirees.
-
Diversification: Low correlation with the stock market; adds stability to a portfolio.
-
No Property Management: Enjoy real estate returns without the landlord headaches.
-
Access to High-Value Assets: Own a slice of premium properties like skyscrapers, medical campuses, or tech parks.
Cons of REIT Investing
-
Tax Treatment: Dividends are taxed at higher rates unless held in a Roth IRA or traditional IRA.
-
Interest Rate Sensitivity: REIT values can drop when interest rates rise.
-
Lack of Control: You don’t choose the properties, tenants, or decisions.
-
Volatility: While less than tech stocks, some REITs (especially mortgage REITs) can be volatile.
FAQs About REITs
Are REITs a good investment for beginners?
Yes. They offer simplicity, liquidity, and income—perfect for beginners who want real estate exposure without the complexity.
Can REITs be part of a retirement portfolio?
Absolutely. REITs are common in 401(k)s and IRAs. The dividends are especially valuable in tax-advantaged accounts.
How are REIT dividends taxed?
Typically, REIT dividends are taxed as ordinary income. However, if you hold REITs in a Roth IRA, the dividends grow and withdraw tax-free.
Can REITs lose money?
Yes. Like any investment, REITs can lose value, especially during economic downturns, rate hikes, or real estate slumps.
What’s better—REITs or rental property?
REITs are easier, more liquid, and less risky short-term. Rental properties offer more control, leverage, and tax shelter but require more work.
Final Thoughts: REITs Offer a Smart, Simple Way to Invest in Real Estate
Whether you’re chasing income, building diversification, or want real estate exposure without owning physical property, REITs offer a compelling opportunity. They combine the growth and stability of property with the convenience and liquidity of stocks.
As part of a long-term portfolio, REITs can provide steady cash flow, inflation protection, and real-world asset exposure—all without ever picking up a hammer or dealing with a leaky faucet.
If you want real estate returns with stock market ease, REITs may be exactly what your portfolio needs.