Understanding REITs: What They Are and Tips for Investing Smartly(Peter Gratton)

Understanding REITs: WhatThey Are and Tips for Investing Smartly Plus tips on how to get started withthese alternative investments

By Peter Gratton

Updated August 24, 2025

Reviewed by Julius Mansa

Fact checked by Suzanne Kvilhaug

Fact checked by Suzanne Kvilhaug

Full Bio
Suzanne is a content marketer, writer, andfact-checker. She holds a Bachelor of Science in Finance degree fromBridgewater State University and helps develop content strategies.
Learn about our editorialpolicies

DefinitionA real estate investment trust (REIT) is acompany that owns, operates, or finances income-generating real estate andsells shares to raise capital to do so.

What Is a Real Estate Investment Trust(REIT)?

Real estate investment trusts (REITs) arecompanies that own, operate, or finance income-producing real estate across awide range of property sectors. These investments, which can often be purchasedthrough top brokerage and real estate crowdfunding platforms, allowyou to earn income from real estate without having to buy,manage, or finance properties yourself.

Created by a 1960 law, REITs were designedto make real estate investing more accessible so smaller investors coulddiversify their portfolio with skyscrapers, shopping malls, or apartmentcomplexes with the same ease as buying stocks. By pooling capital from manyinvestors, REITs have changed and funded much of American real estate, often inways few in the public understand. Below, we’ll explore how they work, whatbenefits and risks you need to know about, and how to invest in them.

Key Takeaways

Real Estate Investment Trusts (REITs) allow investors to own shares in income-producing real estate without managing the properties themselves.
REITs must distribute at least 90% of taxable income as dividends to maintain their tax-advantaged status, leading to steady income streams for investors.
There are three primary types of REITs: equity REITs, mortgage REITs, and hybrid REITs, each with unique investment focuses and risks.
REITs are mostly traded publicly like stocks, providing liquidity and accessibility not commonly found in direct real estate investments. These investments can often be purchased through an online broker or a real estate crowdfunding platform.
Investors should be mindful of REIT-related fraud and are advised to verify the registration and legitimacy of non-traded and private REITs through the SEC's EDGAR system.

Eliana Rodgers / Investopedia

Understanding How REITs Function

Congress created REITs in 1960 via anamendment to the Cigar Excise Tax.1 This allowed firms to gather fundsfrom investors to purchase large real estate portfolios.2 REITs operatelike mutual funds—firms manage pools of funds for the sake of manyinvestors—but for real estate instead of stocks and bonds. Investors earnreturns from dividends and increases in the REIT's share value.3

Central to REITs is that they take thequintessential example of illiquid assets—real estate—and make them liquid.REITs invest in all kinds of properties: apartment complexes, data centers,healthcare facilities, hotels, infrastructure (fiber cables, cell towers, andenergy pipelines), office buildings, retail centers, self-storage units,timberland, and warehouses. REITs tend to specialize in specific real estatesectors, like commercial properties. However, many hold diversified portfoliosof many kinds of properties.4

As you can see below, the amount investorshave pooled in REITs has risen significantly in the past quarter-century,almost exactly tenfold. Also notable is the undulation of the line graph asmarket bubbles inflate, crises and recessions arrive, and interest rates shift.Often thought of as the most stable of stock assets—after all, the sectorincludes the ground beneath your feet—the value of real estate and, thus, thereturns from REITs are certainly not.

Criteria for REIT Qualification

Most REITs lease space, collect rent, anddistribute this income as dividends to shareholders. A small percentage ofREITs, called mortgage REITs, earn money from financing real estate, not owningit.

To qualify as a REIT, a company must meetseveral requirements set by the Internal Revenue Service (IRS).5

These include the following:

Invest at least 75% of total assets in real estate, cash, or U.S. Treasurys
Derive at least 75% of gross income from rent, interest on mortgages that finance real estate, or real estate sales
Pay a minimum of 90% of their taxable income to their shareholders through dividends
Be a taxable corporation
Be managed by a board of directors or trustees
Have a minimum of 100 shareholders
Have no more than 50% of its shares held by five or fewer individuals

Fast Fact
An example of a REIT is HealthpeakProperties Inc. (DOC), an S&P 500 company that owns,manages, and develops healthcare real estate.6

Different Types of REITs Explained

While REITs are categorized by thedifferent kinds of properties they invest in, there have traditionally beenthree major types:

Equity REITs. Equity REITs own and manage real estate that generates income. Revenues are generated primarily through rent, not by reselling properties.
Mortgage REITs. Mortgage REITs lend money to real estate owners and operators directly through mortgages and loans or indirectly through acquiring mortgage-backed securities. Their earnings are generated primarily by the net interest margin—the spread between the interest they earn on mortgage loans and the cost of funding these loans. This model makes them sensitive to interest rate increases—though equity REITs are also greatly affected by rate change.
Hybrid REITs. These REITs mix strategies from both equity and mortgage REITs. After the 2007–2008 financial crisis, these trusts, already on the wane, largely disappeared as regulations changed and REITs became more, not less, specialized.7

A Guide to Investing in REITs
Within the above types are REITs that havedifferent ways of attracting funding. These differences are important forbeginners investing in REITs:

Publicly traded REITs. Shares of publicly traded REITs are listed on a public exchange, where they are bought and sold by individual investors. These fall under U.S. Securities and Exchange Commission (SEC) regulations.8
Public non-traded REITs. These REITs are registered with the SEC but don’t trade on exchanges. As a result, they are less liquid than publicly traded REITs.8 As such, they tend to be more stable because they’re not subject to market volatility. Shares of a non-traded REIT can be bought through a broker or financial advisor who participates in the non-traded REIT’s offering.
Private REITs. These REITs aren’t registered with the SEC and don’t trade on securities exchanges. In general, private REITs can be sold only to institutional investors. They are also the site of many REIT-related frauds.9 While most, of course, are legitimate investments, it’s easier for con artists to ply their trade in this area of real estate than within the regulated markets.

In addition, REITs may be includedin defined benefit and defined contribution plans throughmutual funds and exchange-traded funds (ETFs). Thus, many U.S. investors ownshares in REITs through their retirement savings.

Essential Tips for REIT InvestmentBeginners

If you’re new to REIT investing, hereare tips to get you started:

1. Begin with Publicly Traded REITs

For newcomers, publicly traded REITs offerthe easiest way to get started. You don’t need a vast amount of money—the costof entry is the trust’s share price that interests you. Private REITs,meanwhile, are only open to accredited investors and have minimumsstarting in the low thousands.

When investing in publicly traded REITs,here are strategies to consider:

Do your homework: Examine a REIT’s portfolio, management team, debt levels, and dividend history before investing.
Think of the long-term: REITs are customarily best suited for long-term strategies because of how they generate income.
Examine the fees: There are no direct fees beyond standard brokerage commissions when buying or selling shares. REIT management fees are built into operating expenses, affecting your overall returns. As such, you’ll want to review how comparatively efficient the trust is with managing its expenses—that is, your fees.

Tip 01
The FinancialIndustry Regulatory Authority (FINRA) has repeatedly warnedinvestors about fraud in the sector, showing how many REIT scams involve“REITs” that are anything but: They don’t own real estate, aren’t invested inanything, and aren’t trusts or to be trusted.9

2. Start Small and Scale Up

Start with a small investment andgradually increase it. You might begin by investing a small percentage of yourportfolio—perhaps 2% to 5%—in a broadly diversified REIT or REIT fund. You canthen take the time to get familiar with the real estate market—its incomepotential, its ups and downs, and how its shifts correlate with stocks, bonds,and other assets.

As you do this, pay attention to how yourREIT investments affect your risk profile and other parts of your portfolio.Some financial advisors suggest a well-diversified portfolio might include a 5%to 15% allocation to real estate. However, the right amount depends on yourfinancial goals, risk tolerance, and investment timeline.10 In addition,the real estate market is often cyclical, so scaling up gradually should helpyou avoid being overexposed when a downturn arrives.11

3. Diversify Across REIT Categories

Diversify your investments acrossdifferent real estate sectors, like residential and commercial, to balance yourportfolio. This table gives you a quick view of the different propertycategories and their characteristics:1012

4. Invest in REIT Funds for MoreDiversification

For investors aiming to diversify theirportfolios with real estate, REIT mutual funds and ETFs can help spread risk even furtherthan individual REITs. Both options expose you to a broad spectrum of realestate sectors through a single financial product. However, they come withspecific characteristics you’ll need to consider.

REIT mutual funds, such as the T. Rowe Price Real Estate Fund (TRREX), offer the advantage of professional management. Many fund managers actively select and adjust holdings, potentially capitalizing on market trends or mitigating risks. Some funds are accessible through 401(k) plans (depending on your employer), allowing automatic investing via payroll deductions. This ease of access and expert management is a good way to get into the real estate market while leaving the choice of properties and other assets to the professionals.13
REIT ETFs are either actively managed or passively follow an index. For example, the Pacer Benchmark Industrial Real Estate SCTR ETF (INDS) invests at least 85% of its funds in industrial real estate properties, including warehouses and distribution centers. Pacer’s managers actively oversee the fund, picking the assets they think will outperform the market.

5. Explore Real Estate Index Funds forLow-Cost Diversification

These funds passively track real estateindexes, offering broad market exposure at lower fees than their activelymanaged peers. For example, the Vanguard Real Estate ETF (VNQ) mimics the MSCI US Investable MarketReal Estate 25/50 Index, which covers a wide swath of American real estate.

If you want international exposure, theiShares Global REIT ETF (REET) tracks the NAREIT Global REIT Index,which covers REITs in both developed and emerging markets.

6. Be Tax Savvy

REITs have specific tax implications thatshould be considered since they can greatly impact your returns. These trustsare not typically subject to corporate income tax as long as they distribute atleast 90% of their taxable income to shareholders as dividends.

This pass-through structure can result inhigher dividend yields for investors. However, unlike qualified dividends fromstocks, which are often taxed at lower capital gains rates, most REIT dividendsare taxed as ordinary income. This could result in higher tax bills, especiallyfor investors in higher tax brackets.

Tip 02
The returns of REITs have a relatively lowcorrelation with other assets. That means they don’t necessarily follow what’shappening with stocks, bonds, or other parts of the market. That’s why they canhelp diversify a portfolio: They might stay steady as other assets headdownward. As always, it’s wise to consult a tax professional to understand howany of this would apply to your tax situation.
Many hold REITs in tax-advantagedindividual retirement accounts (IRAs) or 401(k)s to mitigate these tax impacts.This way, REIT dividends can compound tax-free (e.g., in Roth accounts) or taxdeferred (traditional IRAs).This strategy can significantly improve your long-term returns by allowing youto reinvest more of your dividends.

Tip 03
Many REITs also often use leverage (theyborrow) to buy up more properties. When comparing REITs, looking at their debt-to-equity ratios isessential so you’re not putting money into a venture sinking under itsdebt.

7. Stay Up to Date

You’ll want to keep abreast of real estatetrends to make informed decisions about your REIT investments. Keep an eye onbasic economic indicators like interest rates, inflation, and unemployment since thesesignificantly impact real estate values and rental income. You’ll want to keyin on the fundamentals for the sectors where your REITs hold property. Thatmight mean following demographic shifts like urbanization and gentrification,changes in households (people living with their parents longer, etc.) that willaffect demand in different parts of the country, keeping an eye on how officework is migrating to the ex-urbs, or any number of economic and social changesthat affect subsets of the real estate sector.10

Sectors that seem very alike—like shoppingmalls and shopping centers—often perform very differently, and investors needto keep an eye on the specific dynamics for each part of the real estate sectorthat their REITs are invested in.

Pros and Cons of Investing in REITs

Pros

Liquidity
Diversification
Stable cash flow through dividends
Can have attractive risk-adjusted returns

Cons

Low growth
Dividends are taxed as regular income
Subject to market risk
Potential for high management and transaction fees

Shares in REITs are relatively easy to buyand sell, as many trade on public exchanges. REITs offer attractiverisk-adjusted returns and stable cash flow. Real estate in a portfolio addsdiversification and income through dividends.12
REITs offer the possibility of capitalappreciation, but it's important to note that REITs must pay 90% of theirincome back to investors.14 Thus, only 10% of taxable income can bereinvested into the REIT to buy new holdings. In addition, REIT dividends aretaxed as regular income, and some REITs have high management and transactionfees.12

Are REITs a Good Investment?
Whether investing in these trusts is agood idea depends on your financial goals, risk tolerance, and overall stock marketinvesting strategy. REITs offer the potential for steady income throughdividends, portfolio diversification, and exposure to real estate without allthe complexities and headaches of directly owning property. Historically, theyoffer competitive long-term returns and can hedge against inflation.12
However, REITs also have risks, such assensitivity to interest rate changes, economic downturns, and sector-specificchallenges.

How Can Investors Avoid REIT Fraud?
The SEC recommends that investors be waryof anyone who tries to sell REITs that aren’t registered with U.S. regulators.It advises, “You can verify the registration of both publicly traded andnon-traded REITs through the SEC’s EDGAR system.You can also use EDGAR to review a REIT’s annual and quarterly reports, as wellas any offering prospectus.”15 If you stick to regulated REITs, you’llhave the normal risk of such trusts but not the outright fraud that would takeoff with your whole investment.

Do REITs Have to Pay Dividends?
By law, REITs must pay out 90% or more oftheir taxable profits to shareholders as dividends. As a result, REIT companiesare often free from most corporate income tax. Many REITs reinvest shareholderdividends, offering deferred taxation and compounding your gains.16
What Is a Paper Clip REIT?
A “paper clip REIT” increases the taxadvantages of a REIT while allowing it to manage properties that such trustsnormally can’t. It involves two entities “clipped” together via an agreementwhere one entity owns and the other manages the properties. Paper clip REITsentail stricter regulatory oversight since there can be conflicts of interest.They are uncommon.10
Do REITs Offer Monthly Payments?
While some REITs do, that’s not universal.The dividend schedule for REITs varies, with most paying quarterly, somemonthly, and a few annually or semiannually. Monthly-paying REITs are oftenattractive to income-focused investors seeking regular cash flow since manyprovide a steady income via dividends. However, the frequency of paymentsdoesn’t necessarily indicate higher returns or better financial health for theREIT.10

The Bottom Line
REITs democratize real estate investment,providing access to property assets traditionally reserved for the wealthy byallowing shares to be traded like common stocks. They reduce financial andmanagerial burdens associated with direct property investment. REITs offerportfolio diversification, steady income from dividends, and exposure to differentproperty sectors, acting as a hedge against inflation and historicallypresenting competitive long-term returns.
However, they are affected by interestrate fluctuations and specific sector downturns, such as inner-city officespaces. Potential investors should conduct thorough research and considerconsulting financial advisors before investing, weighing the benefits andunderstanding the associated risks.

https://www.investopedia.com/terms/r/reit.asp?hid=826f547fb8728ecdc720310d73686a3a4a8d78af&did=19206738-20250828&utm_campaign=investopedia-term-of-the-day_newsletter&utm_source=investopedia&utm_medium=email&utm_content=082825&lctg=826f547fb8728ecdc720310d73686a3a4a8d78af&lr_input=46d85c9688b213954fd4854992dbec698a1a7ac5c8caf56baa4d982a9bafde6d

Real Estate Investing GuideA Beginner's Guide to Real Estate Investing
RealEstate Investing Basics
REITs

CURRENT ARTICLE

1. Real Estate Investment Trusts (REITs)
2. How to Invest in REITS
3. Direct Real Estate Investing vs. REITs
4. REITs vs. Real Estate Funds
5. Equity REITs vs. Mortgage REITs
6. How to Assess a REIT
7. Risks of REITS
8. Captive Real Estate Investment Trusts
9. How to Analyze REITs

收藏分享評分

凡事唯有投入，結果才能深入; 凡事唯有付出，結果才能傑出;
凡事唯有磨鍊，結果才能熟練; 凡事唯有不煩，結果才能不凡。
能與智者同行，你會不同凡響; 能與高人為伍，你能登上巔峰。
你雖不能改變環境,但卻可以轉換心境;你雖不能樣樣勝利,但卻可以事事盡力。
Dr. Chao Yuang Shiang, senior consultant & Assistant professor,Dep.of Finance,Nanhua University,Taiwan.
website:amazon.com/author/drchao

回復引用

訂閱 TOP

返回列表回復發帖