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.