A REIT or Real Estate Investment Trust is a company that owns and typically operates real estate or related assets that produce income. These may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. Unlike other real estate companies, a REIT does not develop or purchase real estate properties to resell them. Instead, a REIT buys and develops properties primarily to operate them as part of its investment portfolio.
How Does a REIT Work?
REITs were created in the 1960s by Congress to give all individuals the opportunity to benefit from investing in income-producing real estate. REITs allow anyone to own or finance properties the same way they invest in other industries through stock purchase. In the same way, shareholders benefit by owning stocks in other corporations; the stockholders of a REIT earn a share of the income produced through real estate investment without buying or financing the property.
REITs specialize in a specific real estate sector. However, diversified and specialty REITs may hold different properties in their portfolios, such as a REIT that consists of both office and retail properties.
Most REITs operate by leasing space and collecting rent on their real estate. The company generates income which is then paid out to shareholders in dividends. REITs must payout at least 90% of their taxable income to shareholders—and most payout 100%. In turn, shareholders pay the income taxes on those dividends.
Many REITs are publicly traded on major securities exchanges, and investors can buy and sell them like stocks throughout the trading session. These REITs typically trade under substantial volume and are considered very liquid instruments.
REITs usually borrow a lot of money to buy their properties, just as the typical homeowner does. But the consistent cash flows from rents or other payments allow them to borrow substantial amounts relatively safely. This borrowing will enable them to make more money than otherwise.
What Qualifies as a REIT?
There are specific stipulations that a company must adhere to so they can be listed as a REIT.
- Invest at least 75% of its total assets in real estate
- Derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property, or from sales of real estate
- Pay at least 90% of its taxable income in shareholder dividends each year.
- Must be taxable as a corporation.
- Managed by a board of directors or trustees.
- Minimum of 100 shareholders
- No more than 50% of its shares held by five or fewer individuals
Pros and Cons of Investing in REITs
Investing in REITs can have several benefits, such as:
- Dividends. Legally, REITs are required by law to pay at least 90% of their income in dividends. The REIT can choose to pay out over 90% but never below.
- Diversity. It is essential to have a diverse portfolio that can reduce your risk when investing. If one market is struggling, another may be thriving. REITs allow investors to diversify from stocks, bonds, or money market accounts.
- Zero corporate tax. REITs have a significant tax advantage because they do not have a corporate tax when there is no corporate tax, which can mean more money for the investors.
- Liquidity. REITs are more liquid than buying an investment property. It can take a substantial amount of time to buy and sell an investment or rental property, but selling a REIT can be done within minutes once you have completed the paperwork, which you can do easily online.
Compared to other real estate investment opportunities, REITs are relatively simple to invest in and don’t require some of the legwork an investment property would take
Types of REITs
- Equity REITs– Most REITs are equity REITs, which own and manage income-producing real estate. Revenues are generated primarily through rents (not by reselling properties)
- mREITS – mREITs (or mortgage REITs) provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments.
- Private non-listed REITs – Private non-listed REITs (PNLRs) are registered with the SEC but not traded on national stock exchanges.
- Private REITs – Private REITs are offerings that are exempt from SEC registration and whose shares do not trade on national stock exchanges
- Hybrid REITs. These REITs use the investment strategies of both equity and mortgage REITs
REIT Comparisons
| Type of REIT | Holdings |
|---|---|
| Equity | Owns and operate income-producing real estate |
| Mortgage | Holds mortgages on real property |
| Hybrid | Owns properties and holds mortgages |
How to Buy REITs
There are various ways to buy and invest in REITs, some of which you will need a broker or brokerage account to invest into.
- Publicly traded REIT stocks are registered with the SEC and are traded publicly on the major stock exchanges. They usually offer the best chance for public investors to profit on individual investments. Publicly traded REITs are considered superior to private and non-traded REITs. Public companies provide lower management costs and better management because public companies are subject to disclosure and investor oversight.
- Non-Traded REITs are in the middle, like publicly traded companies, they’re registered with the SEC, but they do not trade on major exchanges like private REITs. Since they are registered, this kind of REIT must make quarterly and year-end financial disclosures, and the filings are available to anyone.
- Private REITs do not trade on an exchange and are not registered with the U.S. Securities and Exchange Commission (SEC). Because they’re not registered, they don’t have to disclose the same high level of information to investors that a public company would. Private REITs are generally sold only to institutional investors, such as large pension funds and accredited investors.
- Publicly Traded REIT funds offer the advantages of publicly-traded REITs with some additional safety. REIT funds typically provide exposure to the whole public REIT universe, so you can buy just one fund and get a stake in approximately 200 REITs that trade publicly.
FAQ
Why Should I Invest in REITs?
REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term returns of REIT stocks tend to be similar to those of value stocks and more than the returns of lower-risk bonds.
REITs historically offer investors:
- Competitive long-term performance: REITs have provided long-term total returns similar to those of other stocks.
- Stable dividend yields: Historically, REITs dividend yields have produced a steady income stream through various market conditions.
- Liquidity: Shares of publicly listed REITs are traded on the major stock exchanges
- Diversification: REITs offer access to the real estate market, typically with low correlation with other stocks and bonds
How Are REIT Dividends Taxed?
The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount, including qualified REIT Dividends through Dec. 31, 2025.
How Much of Your Portfolio Should Be in REITs?
After reviewing various investment and wealth management forums, the standard of 5%-15% of your portfolio should be dedicated to REITs.
REITs in Asset Allocation
- Real Estate Investment Trusts can comprise anywhere from 8% to 16% of your income-generating portfolio for asset class diversification.
- Consider recession and interest rate vulnerability for any REIT.
As with any financial product and investing, it is essential to assess the market; your financial situation and diversification are always vital to a well-rounded and secure portfolio.
What Are the Risks of Investing in REITs?
As with any investment product, there are risks that you should be aware of and fully understand. When investing money, it is never done without some risk. This is where risk and reward come into play. Invest the money you can handle losing; it is not wise to invest money you will need for bills or an emergency.
- Potential Tax Consequences. One of the primary risks of REITs is the tax implications not adequately explained to prospective investors. Income distributions from current or accumulated earnings are usually taxed as ordinary income. These taxation rates change when the dividends are taxed, which can carry a tax rate of 15-20% depending on the income bracket
- Non-Traded REITs can Have Inconsistent Value. Many of these REITs are not publicly traded, and they will have a fixed period where they will either have to become publicly traded or be liquidated. Due to this inconsistency, there are many avenues for fraud due to fluctuation of value that could incur substantial investment losses.
- Excessive Fees. When REITs are not traded, they can have expensive and excessive fees. Fees can occur related to selling compensation and expenses and “issuer costs,” which are also paid from the proceeds of the initial offering.
When choosing the type of investments you would like to make, it is essential to speak to an expert or research the information to make the best decision for your family financially.
Conclusion
REITs can be a great tool and investment opportunity to expand and diversify your portfolio. They offer the chance for steady return of dividends and the ability to invest in a large-scale real estate venture that many would traditionally not have the opportunity to do. But like any other investment opportunity, there can be risks involved, so it is essential to review your current investments and how REITs would complement your portfolio.
