A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. Think commercial buildings, apartment complexes, shopping centers, hospitals, warehouses, data centers, and hotels. REITs allow everyday investors to earn income from real estate without buying, managing, or financing properties themselves.
Congress created REITs in 1960 specifically to give small investors access to large-scale, income-generating real estate investments — the same way mutual funds opened stock market investing to ordinary people. Today, REITs are traded on major stock exchanges just like stocks, meaning you can buy shares in a diversified real estate portfolio with as little as a few dollars.
How REITs Work
To qualify as a REIT, a company must meet several requirements set by the IRS:
Invest at least 75% of total assets in real estate. The company’s core business must be real estate ownership or financing.
Earn at least 75% of gross income from real estate. Rent, mortgage interest, and property sales must make up the majority of revenue.
Distribute at least 90% of taxable income to shareholders as dividends. This is the most important requirement for investors. REITs are required by law to pay out the vast majority of their income — which is why they tend to have high dividend yields. The typical REIT pays 3 to 6% or more in annual dividends.
Have at least 100 shareholders and no five individuals owning more than 50%. This ensures REITs remain broadly owned rather than controlled by a small group.
Types of REITs
Equity REITs own and operate income-producing properties. They make money from rents and property appreciation. This is the most common type. Examples: Prologis (warehouses and logistics), American Tower (cell towers), Realty Income (retail properties), AvalonBay Communities (apartment complexes).
Mortgage REITs (mREITs) don’t own properties directly — they lend money to real estate owners and operators, or invest in mortgage-backed securities. They profit from the spread between the interest they earn on loans and their borrowing costs. Higher yield, higher risk, and more sensitive to interest rate changes than equity REITs.
Hybrid REITs combine elements of both equity and mortgage REITs — owning properties while also holding mortgages.
By property type: Within equity REITs, further specialization includes industrial REITs (warehouses, distribution centers), residential REITs (apartments, single-family rentals), healthcare REITs (hospitals, nursing facilities, medical office buildings), retail REITs (shopping centers, malls), office REITs, data center REITs, and specialty REITs (cell towers, self-storage, timber).
How to Invest in REITs
There are three main ways to invest in REITs:
Publicly traded REITs are listed on major stock exchanges (NYSE, NASDAQ) and can be bought and sold through any brokerage account during trading hours. You buy shares just like you’d buy stock in Apple or Microsoft. This is the most accessible and liquid option — most investors who own REITs own them this way.
REIT mutual funds and ETFs pool money from many investors to buy shares in dozens or hundreds of individual REITs, providing broad real estate diversification in a single investment. This is the recommended approach for most individual investors. Popular options include Vanguard Real Estate ETF (VNQ), which holds over 160 REITs and charges a 0.12% expense ratio, and Fidelity Real Estate Index Fund (FSRNX).
Non-traded REITs are not listed on public exchanges. They’re sold directly by brokers, typically to accredited investors or through platforms like Fundrise, and are much less liquid — you can’t sell whenever you want. They often have higher fees and less transparency. Most financial advisors caution ordinary investors to stick with publicly traded REITs and REIT ETFs.
Why Invest in REITs?
Income. The 90% dividend distribution requirement means REITs generate above-average income for investors. In a low-yield environment, a 4 to 6% REIT dividend looks attractive compared to savings accounts or bond yields.
Diversification. Real estate doesn’t always move in the same direction as stocks. Adding REITs to a portfolio that’s mostly stocks and bonds can reduce overall volatility because the correlation between real estate and stock market returns is imperfect.
Inflation protection. Real estate tends to maintain its value during inflationary periods because rents and property values typically rise with inflation. REITs provide some built-in inflation protection that pure stock or bond investments don’t always offer.
Liquidity. Unlike owning physical real estate (which can take months to sell), publicly traded REIT shares can be sold instantly during market hours. This makes REITs far more flexible than direct property ownership.
No property management. Owning real estate directly means dealing with tenants, maintenance, vacancy, and all the headaches of being a landlord. REITs handle all of this — professional management teams run the properties while you simply hold shares.
REIT Risks to Understand
Interest rate sensitivity. REITs borrow money to finance properties, and higher interest rates increase their borrowing costs and reduce profitability. REITs often underperform when interest rates rise because their financing costs increase and their dividends become less attractive compared to bonds.
Dividend taxes. REIT dividends are generally taxed as ordinary income (not the lower qualified dividend rate), making them less tax-efficient in taxable accounts. Holding REITs in a tax-advantaged account like a Roth IRA avoids this issue entirely — dividends compound tax-free.
Sector-specific risk. Individual REIT types are heavily influenced by the sectors they serve. Retail REITs struggled during the rise of e-commerce. Office REITs faced pressure during the work-from-home shift. Diversified REIT ETFs reduce this risk by spreading across multiple property types.
Market volatility. Publicly traded REITs move with the stock market in the short term, even if the underlying real estate fundamentals are sound. During broad market selloffs, REIT prices fall alongside other stocks. Long-term investors can ride out this volatility; short-term investors cannot.
REITs vs Direct Real Estate Investment
Both are valid ways to invest in real estate. Here’s how they compare:
REITs: Low barrier to entry (buy shares for any amount), highly liquid, fully passive, professionally managed, diversified across many properties, dividends paid regularly, no leverage unless you buy on margin.
Direct real estate: High barrier to entry (down payment, closing costs), illiquid, active management required (or hiring a property manager), concentrated in specific properties, potential for larger returns through leverage, tax advantages (depreciation, mortgage interest deduction).
For most investors — especially those without significant capital or interest in being a landlord — REITs are the more practical path to real estate exposure in a portfolio. For investors who want to use leverage, build equity through mortgage paydown, and are comfortable with active management, direct real estate can offer higher returns at higher complexity and risk.
If you’re interested in direct real estate but don’t have a down payment, see our guide on how to invest in real estate with little money.
How Much of Your Portfolio Should Be in REITs?
There’s no universal answer, but common guidance suggests 5 to 15% of your total portfolio in real estate investments (REITs or direct property). The academic research suggests a real estate allocation in this range can improve risk-adjusted returns for most long-term portfolios.
If you’re just starting out and building your first portfolio, the simplest approach is to hold a broad index fund — most total stock market funds already include a 3 to 5% allocation to REITs, giving you automatic real estate exposure without a separate investment. As your portfolio grows, you can consider a dedicated REIT ETF to increase that exposure.
Frequently Asked Questions
Are REITs a good investment? Historically, REITs have delivered solid long-term returns with attractive income. The FTSE NAREIT All Equity REITs Index has historically returned about 9 to 11% annually over long periods. They work well as part of a diversified portfolio, particularly for investors who want real estate exposure and income.
Do REITs pay dividends monthly? Some do, some don’t. Realty Income (ticker: O) is famous for paying monthly dividends. Most REITs pay quarterly. Check the dividend schedule for any specific REIT before investing.
Can I hold REITs in a Roth IRA? Yes, and it’s often recommended. Holding REITs in a Roth IRA means dividends compound tax-free rather than being taxed as ordinary income each year. This can significantly improve long-term after-tax returns.
What’s the best REIT for beginners? A REIT ETF like Vanguard Real Estate ETF (VNQ) or Fidelity MSCI Real Estate Index ETF (FREL) is the best starting point. Broad diversification, low fees, and instant exposure to dozens of REITs without needing to research individual companies.