REITs — Real Estate Investment Trusts — let you invest in real estate without buying property, dealing with tenants, or taking out a mortgage. You buy shares the same way you’d buy stock, and the REIT pays you regular dividends from the rental income it collects. Here’s how they work and whether they belong in your portfolio.
What a REIT actually is
A Real Estate Investment Trust is a company that owns, operates, or finances income-producing real estate. Congress created REITs in 1960 to give everyday investors access to large-scale real estate the same way mutual funds opened up the stock market. By law, REITs must distribute at least 90% of their taxable income to shareholders as dividends — which is why they’re known for above-average dividend yields. In exchange for that distribution requirement, REITs pay little to no corporate income tax.
The main types of REITs
- Equity REITs. Own and operate physical properties — apartment complexes, office buildings, shopping centers, warehouses, data centers, hospitals. This is the most common type. Income comes from rent collected from tenants.
- Mortgage REITs (mREITs). Don’t own properties — instead, they lend money to real estate owners or buy mortgage-backed securities. Income comes from the interest on those loans. Higher dividend yields but more sensitive to interest rate changes.
- Hybrid REITs. Combine both equity and mortgage strategies. Less common.
- Public non-traded REITs and private REITs. Not listed on stock exchanges. Less liquid, harder to value, and typically only accessible to accredited investors. Most individual investors should stick to publicly traded REITs.
REIT sectors worth knowing
Not all REITs are alike — the sector matters as much as the asset class. Industrial REITs (warehouses, logistics centers) have been among the strongest performers as e-commerce grows. Data center REITs own the physical infrastructure the cloud runs on. Healthcare REITs own hospitals, senior living facilities, and medical office buildings. Residential REITs own apartment buildings and single-family rental homes. Retail REITs own malls and shopping centers — a sector that’s been under pressure since 2016. Understanding the sector helps you assess the underlying demand drivers.
How to invest in REITs
- Individual REIT stocks. Buy shares of specific REITs through any brokerage account — Fidelity, Schwab, Vanguard, or any other. Ticker examples include Realty Income (O), Prologis (PLD), and American Tower (AMT). Research the specific properties, occupancy rates, and payout history before buying.
- REIT ETFs and index funds. Funds like Vanguard Real Estate ETF (VNQ) or Schwab US REIT ETF (SCHH) hold dozens of REITs in a single fund, giving you instant diversification across sectors. Lower risk than picking individual REITs, with low expense ratios.
- REIT mutual funds. Actively managed funds that specialize in real estate. Higher fees than ETFs, with debatable performance advantages.
The tax situation with REIT dividends
REIT dividends are mostly taxed as ordinary income — not at the lower qualified dividend rate — because REITs pass through income rather than retaining and paying corporate taxes on it. This makes REITs especially well-suited for tax-advantaged accounts like IRAs and 401(k)s, where dividends grow tax-deferred or tax-free. Holding REITs in a taxable brokerage account isn’t wrong, but be aware of the tax drag compared to qualified dividend-paying stocks.
What REITs won’t do for you
REITs are sensitive to interest rates — when rates rise, REIT prices often fall because their dividends look less attractive relative to bonds, and their borrowing costs increase. They also don’t give you the leverage benefit of owning rental property directly. A landlord who puts 20% down and buys a $300,000 property is controlling $300,000 in assets with $60,000. A REIT investor putting in $60,000 controls $60,000 in assets. REITs offer simplicity and liquidity; direct real estate offers leverage and control. They’re different tools for different situations.
Who REITs make sense for
REITs work well for investors who want real estate exposure in a diversified portfolio without the complexity of property ownership, income-focused investors who want higher dividend yields than most stocks provide, and people investing inside an IRA where the ordinary income tax treatment is neutralized. Most financial planners suggest a 5–20% allocation to real estate within a broader portfolio — REITs are one of the cleanest ways to achieve that.