What Is a REIT?
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. REITs allow everyday investors to earn dividends from real estate investments without having to buy, manage, or finance properties themselves.
By law, REITs must distribute at least 90% of their taxable income to shareholders as dividends, making them one of the most reliable income-producing investments available.
Types of REITs
Equity REITs
The most common type. These REITs own and operate income-generating properties like apartments, offices, shopping centers, and warehouses. Revenue comes primarily from rent.
Mortgage REITs (mREITs)
These REITs provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities. They earn income from the interest on these financial assets.
Hybrid REITs
A combination of equity and mortgage REITs that both own properties and hold mortgages.
| REIT Type | Income Source | Risk Level | Typical Yield |
|---|---|---|---|
| Equity REIT | Rental income | Moderate | 3-5% |
| Mortgage REIT | Interest income | Higher | 6-12% |
| Hybrid REIT | Both | Moderate-High | 4-8% |
Why Invest in REITs?
Passive income: REITs provide regular dividend payments, often quarterly.
Diversification: Real estate often moves differently than stocks and bonds, reducing overall portfolio risk.
Liquidity: Unlike physical real estate, publicly traded REITs can be bought and sold instantly on stock exchanges.
Accessibility: You can invest in a diversified real estate portfolio with as little as the price of one share.
Inflation hedge: Real estate values and rents tend to rise with inflation, providing natural protection.
How to Invest in REITs
- Individual REIT stocks: Buy shares of specific REITs through any brokerage account
- REIT ETFs: Invest in a basket of REITs through exchange-traded funds like VNQ or SCHH
- REIT mutual funds: Similar to ETFs but with different fee structures
- Non-traded REITs: Private REITs not listed on exchanges (less liquid, higher minimums)
Risks to Consider
- Interest rate sensitivity: REITs often decline when interest rates rise
- Sector concentration: Some REITs focus on a single property type
- Tax treatment: REIT dividends are typically taxed as ordinary income, not at the lower qualified dividend rate
- Market volatility: Publicly traded REITs can be as volatile as stocks
Key Takeaways
- REITs let you invest in real estate without buying physical property
- They must pay out 90% of taxable income as dividends
- REIT ETFs offer the easiest way to get diversified real estate exposure
- Consider REITs as 5-15% of a diversified portfolio
- Be aware of interest rate sensitivity and tax implications