A REIT (real estate investment trust) is a company that owns or finances income-producing property, such as apartments, warehouses, offices, data centers or cell towers. To keep its special tax status, a US REIT must pay out at least 90% of its taxable income to shareholders as dividends, which is why REITs are popular with income investors.
How REITs work
You buy shares of a REIT on the stock market, just like any other stock. The REIT collects rent or mortgage interest, pays its costs and passes most of the profit to you as dividends. Because it pays out so much, a REIT usually avoids corporate income tax, but it has to borrow or sell new shares to grow.
Types of REITs
| Type | What it owns |
|---|---|
| Equity REITs | Physical property, collecting rent. Most REITs are this type. |
| Mortgage REITs (mREITs) | Mortgages and mortgage securities, earning interest. Higher yields, higher risk. |
| Public non-traded REITs | Property, but shares do not trade on an exchange and are hard to sell. |
Equity REITs span many sectors: residential, industrial, retail, office, healthcare, self-storage, data centers and cell towers, each with its own risks.
Pros
- Exposure to real estate without buying property or dealing with tenants.
- Above-average dividends, often paid quarterly and sometimes monthly.
- Easy to buy and sell, and easy to diversify through a REIT ETF.
Cons
- Rate sensitivity: REIT prices often fall when interest rates rise, because their dividends look less attractive and borrowing costs more.
- Tax: most REIT dividends are taxed as ordinary income rather than at lower qualified dividend rates, although many investors can deduct up to 20% of them under the qualified business income rules.
- Sector risk: office REITs, for example, have struggled with remote work.
Because of the tax treatment, many investors hold REITs inside an IRA, 401(k), TFSA or ISA.
How to invest in REITs
- REIT ETFs hold dozens of REITs in one fund for broad, low-cost exposure.
- Individual REITs let you target a sector, but carry more risk.
- Your index fund already has some: an S&P 500 fund such as VOO or VTI holds REITs too.
Compare REIT income with other options in our guides to monthly dividend stocks and Dividend Kings, and estimate income with the dividend calculator.
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Frequently asked questions
Are REITs a good investment?
They can add income and diversification, but they swing with interest rates. Many people keep them to a small slice of a portfolio.
How are REIT dividends taxed?
Mostly as ordinary income, with part sometimes treated as capital gains or return of capital. Your 1099-DIV shows the split.
Can I lose money in a REIT?
Yes. Share prices can fall and dividends can be cut.
This article is general information, not financial or tax advice.
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