REITs

· 3 min read
A REIT — Real Estate Investment Trust — is a company that owns income-producing real estate and pays most of its profits to shareholders as…

A REIT — Real Estate Investment Trust — is a company that owns income-producing real estate and pays most of its profits to shareholders as dividends, which means you can invest in office towers, hospitals, and shopping centers the same way you’d buy shares of Apple.

REITs were created by Congress in 1960 to give everyday investors access to large-scale real estate. Before REITs, you needed serious capital to invest in commercial properties. Now you can buy a share for the price of a coffee and own a tiny piece of a $10 billion property portfolio.

How REITs Work

By law, REITs must distribute at least 90% of taxable income as dividends to shareholders. In exchange, they pay little to no corporate income tax. This pass-through structure is why REIT dividend yields typically range from 3-8% — significantly higher than the S&P 500’s average yield of about 1.5%.

REITs must also meet specific requirements:

  • Invest at least 75% of assets in real estate
  • Derive at least 75% of income from rents, mortgage interest, or real estate sales
  • Have at least 100 shareholders
  • No more than 50% of shares held by five or fewer individuals

Types of REITs

Equity REITs own and operate properties. They collect rent, maintain buildings, and pass income to shareholders. About 90% of REITs are equity REITs. Examples: Prologis (warehouses), American Tower (cell towers), Realty Income (retail).

Mortgage REITs (mREITs) don’t own properties — they own real estate debt. They buy mortgages or mortgage-backed securities and earn income from the interest spread. Higher yields (8-12%) but much more volatile and interest-rate sensitive.

Hybrid REITs own both properties and mortgages. They’re less common and typically lean heavily toward one side.

REIT Sectors

The REIT universe covers virtually every property type:

  • Residential: Apartment complexes (AvalonBay, Equity Residential)
  • Industrial: Warehouses, distribution centers (Prologis, Duke Realty)
  • Retail: Shopping centers, malls (Simon Property Group, Realty Income)
  • Healthcare: Hospitals, senior housing, medical offices (Welltower, Ventas)
  • Data centers: Server facilities (Equinix, Digital Realty)
  • Self-storage: Storage facilities (Public Storage, Extra Space Storage)
  • Specialty: Cell towers, timberland, casinos, farmland

REITs vs. Direct Property Ownership

REITs offer liquidity — sell your shares in seconds. Direct ownership ties up capital for months or years. REITs provide instant diversification across dozens of properties. Direct ownership concentrates risk in one or two assets.

But direct ownership gives you use benefits, tax deductions through depreciation, and control over the investment. REIT dividends are taxed as ordinary income (no preferential capital gains rate), and you have zero say in management decisions.

The hybrid approach works well: own a few rental properties for cash flow and tax benefits, hold REITs in your retirement accounts for diversification and hands-off exposure to property sectors you couldn’t invest in directly.

REIT Performance

Over the last 25 years, equity REITs have returned approximately 9-11% annually including dividends — competitive with the S&P 500. They also provide inflation protection since rents typically rise with prices, and moderate diversification since REITs don’t perfectly correlate with stock market movements.

The risk? REITs are interest-rate sensitive. When rates rise, REIT prices often fall because their dividends become less attractive relative to bonds, and borrowing costs increase. The 2022 rate hike cycle saw many REITs drop 20-30%.

Compare REIT returns to direct property investing using our mortgage calculator. Our buying guide covers traditional property investing, and the glossary has more investment terms worth knowing.