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Real Estate Investing
REITs: A Smarter Way to Invest in Real Estate
Learn how Real Estate Investment Trusts work, how they generate income, the major REIT types, their risks and taxes, and what to consider before adding REITs to a diversified investment portfolio.
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What Is a REIT?
A Real Estate Investment Trust, commonly called a REIT, is a company that owns or typically operates income-producing real estate or real-estate-related assets. Instead of purchasing an apartment building, warehouse, shopping center or other property yourself, you can potentially gain exposure to a portfolio of real estate through REIT shares.
That structure can make real estate easier to access for investors who want exposure to property without dealing directly with tenants, maintenance, property management or a large down payment on an individual property.
Real estate exposure
Participate in income-producing property markets without directly owning a building.
Potential income
REIT structures can distribute income to shareholders, although distributions are never guaranteed.
Portfolio diversification
REITs can provide a different type of exposure within a broader investment portfolio.
Property Exposure
Without direct ownership
How It Works
How REIT Investing Works
The basic REIT model connects investors with income-producing real estate through an investment structure that can be accessed through securities markets or other investment channels.
01
Capital is raised
Investors provide capital by purchasing shares or interests in a REIT, depending on the REIT structure.
02
Assets are acquired
The REIT uses capital and financing to acquire or finance qualifying real estate and related assets.
03
Properties generate income
Income may come from sources such as property rents or interest on real-estate-related debt.
04
Investors receive distributions
Qualifying REITs generally must distribute at least 90% of taxable income annually, subject to applicable rules.
REIT Categories
Three Major Types of REITs
REITs can have very different business models. Understanding what actually produces the income is one of the first steps in evaluating one.
Equity REITs
Equity REITs generally own and operate income-producing properties. Their portfolios can include apartments, offices, industrial facilities, retail properties, hotels, self-storage and other real estate.
Property focusedMortgage REITs
Mortgage REITs generally provide financing to real estate owners or invest in real-estate-related debt such as mortgages or mortgage-backed securities. Their risks can be more sensitive to financing and interest-rate conditions.
Debt focusedHybrid REITs
Hybrid REITs combine elements of equity and mortgage REIT strategies, giving investors exposure to both property-related assets and real-estate-related financing.
Mixed strategy
Why Investors Consider REITs
Real Estate Exposure Without Becoming a Landlord
Direct property ownership can require substantial capital, financing, maintenance, insurance, property taxes, tenant management and ongoing decision-making. REITs can provide another route to participate in real estate markets.
Lower direct ownership burden
You do not personally manage the underlying buildings, leases or maintenance.
Income potential
Many REIT investors focus on distributions generated from the underlying real estate business.
Market accessibility
Publicly traded REIT shares can generally be bought and sold through a brokerage account.
Portfolio flexibility
Investors can choose individual REITs or diversified REIT funds depending on their strategy.
Important Distinction
Publicly Traded vs. Non-Traded REITs
The way a REIT trades can materially affect liquidity, pricing, transparency, fees and how easily an investor can exit.
| Factor | Publicly Traded REIT | Non-Traded REIT |
|---|---|---|
| Trading | Shares trade on a public exchange. | Shares are not listed on a national public exchange. |
| Liquidity | Generally easier to buy or sell through the market. | Liquidity can be limited and redemption programs may have restrictions. |
| Pricing | Market price is generally available during trading. | There is no continuously available exchange price. |
| Fees | Brokerage and fund-related costs may apply. | Offering, transaction and management fees can be significant. |
| Information | Public filings and market data are broadly available. | Investors should carefully review the offering documents and valuation information. |
Before You Invest
How to Evaluate a REIT
A high distribution yield alone does not tell you whether a REIT is a strong investment. Look at the underlying business and the risks behind the income.
Property Portfolio
Understand what property types the REIT owns, where they are located, who uses them and how diversified the portfolio is.
Debt & Leverage
Review the REIT's borrowing, debt maturity profile, interest costs and exposure to refinancing conditions.
Occupancy & Tenants
For property-focused REITs, occupancy, tenant concentration and lease characteristics can influence the stability of property income.
Distribution Quality
Look beyond the headline yield and understand how distributions are supported by the REIT's operating performance and cash generation.
Interest-Rate Sensitivity
Changes in interest rates can affect borrowing costs, property values, investor demand and the relative attractiveness of income-producing investments.
Fees & Management
Review management compensation, operating expenses, acquisition costs and other fees that can reduce investor returns.
Tax Considerations
How REIT Taxes Can Differ
REIT taxation can be different from the taxation of ordinary corporate dividends. REIT distributions may have different tax characteristics, and the exact treatment depends on the distribution and the investor's circumstances.
Before making an investment decision, review the REIT's tax information and consider how the investment fits within your broader tax plan. Tax treatment can also differ depending on whether the REIT is held in a taxable account or a tax-advantaged account.
Distributions
REIT distributions may not receive the same treatment as qualified
dividends from many traditional corporations.
Capital Gains
Selling REIT shares for a gain can create a capital-gain tax
consequence depending on the investor's circumstances.
Tax-Advantaged Accounts
Holding REIT investments inside certain retirement accounts can
change when and how investment income is taxed.
Risk Matters
REITs Are Not Risk-Free
REITs provide real estate exposure, but they remain investments whose value and income can change. A diversified property portfolio does not eliminate market, business, financing or economic risk.
Market volatility
Publicly traded REIT prices can rise or fall with broader market conditions and investor expectations.
Interest-rate risk
Higher rates can affect financing costs and the relative appeal of income-producing investments.
Property-sector risk
Changes in tenant demand, rents, operating costs or property values can affect individual REITs.
Liquidity risk
Non-traded REITs can have materially different liquidity and redemption characteristics than exchange-listed REITs.
Beginner Checklist
Questions to Ask Before Buying a REIT
A simple checklist can help you focus on the investment itself rather than chasing the highest advertised yield.
01
What does it own?
Identify the property sectors, locations and major sources of revenue.
02
How does it earn?
Understand whether income primarily comes from property operations, mortgages or another real-estate-related strategy.
03
What are the risks?
Review debt, interest rates, tenants, property markets, management and concentration risks.
04
Does it fit my plan?
Consider your time horizon, diversification, income needs and overall risk tolerance before investing.
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REITs — FAQs
Frequently Asked Questions
REIT Questions, Answered
A REIT, or Real Estate Investment Trust, is a company that owns
and typically operates income-producing real estate or
real-estate-related assets. REITs can give individual investors
access to real estate exposure without directly purchasing and
managing individual properties.
No. With a REIT, you generally invest in an entity that owns or
finances real estate. With a rental property, you directly own
the property and are responsible for financing, taxes,
maintenance, insurance and property management.
Equity REITs generally own and operate income-producing real
estate. Their portfolios can focus on sectors such as
apartments, retail, industrial properties, offices,
healthcare facilities or self-storage.
Mortgage REITs generally provide financing to real estate
owners and operators or invest in real-estate-related debt.
Their performance can be particularly sensitive to interest
rates, borrowing costs and credit conditions.
No. REIT distributions are not guaranteed. Property income,
financing conditions, operating performance and other factors
can affect the amount and sustainability of distributions.
REIT distributions can have different tax characteristics from
dividends paid by many traditional corporations. The actual tax
treatment depends on the type of distribution and your personal
circumstances, so investors should review the REIT's tax
reporting and consult a qualified tax professional when needed.
Publicly traded REIT shares generally trade on public exchanges,
making them easier to buy and sell than non-traded REITs.
Liquidity can still vary with market conditions and trading
activity.
Start with the REIT's property portfolio, revenue sources,
debt, occupancy and tenant exposure, distribution history,
valuation, fees, management structure and major risk factors.
Avoid evaluating a REIT solely by its advertised dividend yield.
Build Your Knowledge
Make Real Estate Investing Decisions With More Clarity
Whether you are exploring REITs, rental properties or direct real estate investing, understanding the fundamentals can help you compare opportunities more thoughtfully.
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Educational content only. Investment decisions should consider your
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