What Is a REIT (Real Estate Investment Trust)?
In plain English
A real estate investment trust (REIT) is a company that owns, operates, or finances income-producing real estate across a range of property sectors. To qualify as a REIT, a company must distribute at least 90% of its taxable income as dividends to shareholders annually. REITs allow individual investors to access large-scale, diversified real estate investments and earn regular income without buying or managing properties directly.
What Types of REITs Are Available?
Equity REITs own and operate physical properties — including apartment complexes, shopping centers, office buildings, data centers, cell towers, warehouses, and healthcare facilities. Mortgage REITs (mREITs) invest in real estate mortgages and mortgage-backed securities, earning income from interest rather than rents. Hybrid REITs combine both strategies. REITs can be publicly traded on exchanges, publicly non-traded, or private.
What Are the Tax Implications of Investing in REITs?
Because REITs distribute 90% of taxable income, their dividends are typically classified as ordinary income rather than qualified dividends, meaning they are taxed at your regular income tax rate rather than the lower capital gains rate. The Tax Cuts and Jobs Act of 2017 introduced a 20% deduction on qualified REIT dividends for eligible investors. Holding REITs in tax-advantaged accounts like IRAs can eliminate this tax drag.
How Do REITs Compare to Buying Rental Property?
REITs provide real estate exposure without the capital requirements, management headaches, or illiquidity of direct property ownership. You can buy or sell REITs as easily as stocks. However, direct rental property allows greater control, more tax deductions (depreciation, mortgage interest), and the use of leverage through a mortgage. REITs offer diversification across dozens or hundreds of properties; rental property concentrates risk in specific locations.
Frequently asked questions
How much do REITs typically yield?
REIT dividend yields have historically ranged from 3% to 6% on average for equity REITs, though yields vary significantly by sector and market conditions. Mortgage REITs can yield higher but carry more interest rate risk. Compared to stocks, REITs generally offer higher current income in exchange for somewhat lower capital appreciation potential.
Are REITs a good hedge against inflation?
REITs have historically provided some inflation protection because property values and rents tend to rise with inflation. Many lease agreements include rent escalation clauses tied to inflation measures. However, rising interest rates — often used to combat inflation — can reduce REIT prices by making their yields less competitive compared to bonds.
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Related terms
Dividend
A dividend is a portion of a company's profits paid out to shareholders, typically on a quarterly basis. Dividends provide investors with regular income in addition to any stock price appreciation.
Passive Income
Passive income is money earned with minimal ongoing effort, generated from investments or assets you have already set up. In investing, common passive income sources include dividends, bond interest, REIT distributions, and rental income.
Yield
Yield is the income generated by an investment expressed as a percentage of its cost or current value. It is a key metric for evaluating bonds, dividend stocks, REITs, and other income-producing investments.
Diversification
Diversification means spreading investments across different assets, sectors, and geographies to reduce risk. It reflects the principle of not putting all your eggs in one basket.
Asset Allocation
Asset allocation is how you divide your investment portfolio among different asset classes like stocks, bonds, and cash. Your allocation is the single biggest driver of your portfolio's long-term risk and return.