Many people want to invest in real estate but find the costs and responsibilities overwhelming. Buying properties requires large down payments, ongoing maintenance, and the stress of managing tenants—barriers that keep most investors out.
That’s where real estate investment trusts (REITs) come in. REITs own more than $4 trillion in gross real estate assets across the U.S., giving everyday investors a simple way to access real estate without buying property directly. With REITs, you can purchase shares just like a stock and earn income from some of the same properties that big institutions invest in.
In this guide, we’ll break down how REITs work, the different types available, and the pros and cons to consider before deciding if they fit into your portfolio.
What Is a Real Estate Investment Trust (REIT)?
A real estate investment trust (REIT) is a company that owns and operates income-generating real estate. A group of investors will pool their money together to invest in a REIT, which makes it possible for you to earn rental income from real estate without buying and managing it yourself.
REITs invest in all sectors of the real estate market, including apartment buildings, hotels, retail locations, warehouses, and more.
Investing in REITs is popular due to its potential for a stable income and ease of buying and selling, as most REITs are publicly traded. Additionally, the wide range of real estate sectors that REITs invest in adds to their appeal, providing investors with diverse investment opportunities.
REIT Requirements Under IRS Rules
To be recognized as a Real Estate Investment Trust (REIT) by the Internal Revenue Code (IRC), a company must adhere to several guidelines, such as:
- Offering shareholders a minimum of 90% of taxable income as dividends each year.
- Investing a minimum of 75% of its resources in real estate assets or cash.
- Generating at least 75% of its gross income through real estate rentals, mortgage interest, or sales.
- Being taxed as a corporation.
- Maintaining a board of directors or trustees.
- Having a minimum of 100 shareholders after its first year in operation.
- Limiting the ownership of its shares by no more than five individuals, with each holding no more than 50% of the total shares
Different Types of REITs Explained
Not all REITs are the same. The way they’re structured and the kind of real estate they invest in can make a big difference in how risky they are and what kind of returns they may offer. Here are the main types:
- Publicly traded REITs: Listed on major stock exchanges like the NYSE or NASDAQ, these are the most liquid and transparent option. You can buy and sell them through any brokerage account.
- Public non-traded REITs: Registered with the SEC but not listed on an exchange. They’re harder to value and sell, which makes them less flexible than publicly traded REITs.
- Private REITs: Not traded on exchanges and often limited to institutional or accredited investors. They can require high minimum investments and come with more risk due to less oversight.
- Equity REITs: Own and manage physical properties, collecting rent as their primary income. This is the most common type.
- Mortgage REITs: Invest in mortgages and mortgage-backed securities instead of properties themselves. They typically offer higher yields but carry more interest-rate risk.
- Hybrid REITs: Combine equity and mortgage strategies, owning properties while also holding real estate debt.
Historical Performance of REITs
One of the reasons REITs remain popular is their long track record of delivering steady returns. Over the past two decades, equity REITs have produced average annual returns in the 8–12% range, depending on the time period measured. That performance is comparable to, and sometimes better than, the S&P 500, with the added benefit of consistent dividend income.
REIT dividends typically yield around 3–5% annually, higher than the average dividend yield of most stocks. While returns can fluctuate during economic downturns or periods of rising interest rates, REITs as an asset class have historically rebounded well and delivered solid long-term growth.
For investors focused on both income and capital appreciation, this performance history makes REITs a compelling way to balance stability with growth.
Pros & Cons of Investing in REITs
Like any investment, REITs come with both advantages and drawbacks. Understanding these can help you decide if they fit your portfolio.
Pros
- Portfolio diversification: Adds real estate exposure without having to buy properties yourself.
- Regular income: By law, REITs must pay out at least 90% of taxable income to shareholders in dividends.
- Liquidity: Shares of publicly traded REITs can be bought or sold quickly, unlike physical real estate.
- Professional management: You benefit from experienced real estate managers overseeing large portfolios.
Cons
- Dividend risk: Payouts can shrink during economic downturns if properties stop producing steady income.
- Interest-rate sensitivity: Rising rates can hurt REIT performance and lower share prices.
- High minimums on some REITs: Non-traded and private REITs may require $25,000 or more to get started.
- Potential lack of growth: Since REITs distribute most of their earnings, less cash is available for reinvestment.
Tax Implications of REITs
Taxes play a big role in REIT investing. Unlike many stocks, most REIT dividends are not considered “qualified dividends.” Instead, they’re taxed as ordinary income, which means you could pay a higher rate depending on your tax bracket.
In addition to regular dividends, REITs may also distribute capital gains if they sell properties for a profit. These gains are taxed at the capital gains rate, which is often lower than ordinary income rates. A small portion of REIT dividends may also be classified as return of capital, which reduces your cost basis and defers taxes until you sell your shares.
Because of these rules, many investors prefer holding REITs in tax-advantaged accounts such as IRAs or 401(k)s. Inside a retirement account, dividends can grow tax-deferred (traditional IRA/401(k)) or tax-free (Roth IRA), helping you keep more of what you earn.
REITs in Retirement Accounts
REITs can be especially attractive inside tax-advantaged accounts like IRAs and 401(k)s. That’s because most REIT dividends are taxed as ordinary income, which can be costly in a regular brokerage account. By holding REITs in a traditional IRA or 401(k), your dividends grow tax-deferred until withdrawal. If you use a Roth IRA, your dividends and potential growth can even be tax-free in retirement.
This makes retirement accounts one of the most efficient places to keep REIT investments. You still get steady income and long-term growth potential, but without the yearly tax hit that can erode returns in a taxable account.
How to Invest in REITs
Getting started with REITs is straightforward. The simplest option is to buy shares of publicly traded REITs through an online broker, just like you would with stocks. You can also invest in REIT-focused mutual funds or exchange-traded funds (ETFs), which spread your money across dozens of different REITs for built-in diversification.
If you prefer a more hands-off approach, many investors use REIT ETFs such as the Vanguard Real Estate ETF (VNQ) or the iShares U.S. Real Estate ETF (IYR). These funds provide broad exposure to the real estate market without requiring you to pick individual companies. For those interested in non-traded or private REITs, access is usually limited to certain brokers or accredited investors, and the minimums are often much higher.
REIT ETFs and Index Funds
If you don’t want to research and pick individual REITs, a REIT-focused mutual fund or exchange-traded fund (ETF) can be a simpler option. These funds hold dozens or even hundreds of REITs, giving you broad exposure to the real estate market through a single investment.
Some of the most popular choices include the Vanguard Real Estate ETF (VNQ) and the iShares U.S. Real Estate ETF (IYR). Both track large baskets of publicly traded REITs and are designed for long-term investors who want diversification without the hassle of building their own portfolio. Since these ETFs trade like stocks, you can buy and sell them easily through any brokerage account.
Are REITs Right for You?
REITs can be a strong fit if you want steady dividend income and exposure to real estate without the headaches of being a landlord. They also make sense for investors who value liquidity, since shares of publicly traded REITs can be sold at any time.
That said, they’re not for everyone. If you’re uncomfortable with the impact of interest rates on returns or you prefer investments with higher growth potential, you may find REITs less appealing. The key is to match them with your goals: income-focused investors and those seeking diversification often benefit the most, while growth-focused investors may want to balance REITs with other asset classes.
Final Thoughts
REITs make it possible to invest in real estate without the high costs, upkeep, or stress of owning properties yourself. They offer steady income through dividends, liquidity that traditional real estate can’t match, and a long history of solid performance.
That said, REITs still carry risks. Rising interest rates, market downturns, or choosing the wrong type of REIT can affect your returns. This is why it’s important to weigh your financial goals, risk tolerance, and investment timeline before committing.
For many investors, REITs are an effective way to diversify a portfolio and build reliable income streams. If you’re curious about where to start, platforms like Fundrise make it possible to begin investing in real estate with just a small amount of money. Check out our full Fundrise review to see if it’s the right fit for you.
Frequently Asked Questions
What is the average return on REITs?
Historically, equity REITs have delivered average annual returns in the 8–12% range, depending on the timeframe and market conditions. A large portion of those returns comes from steady dividends, which typically yield between 3–5% per year. While past performance doesn’t guarantee future results, REITs have a track record of keeping pace with or even outperforming the stock market over long periods.
How do interest rates affect REIT performance?
REITs are sensitive to interest rate changes. When rates rise, borrowing costs increase for REITs, which can hurt profits and weigh on share prices. Higher rates also make REIT dividends less attractive compared to safer fixed-income investments. On the other hand, when rates are stable or declining, REITs often perform better as financing becomes cheaper and their income stream looks more appealing.
Which types of REITs are best for beginners?
Publicly traded equity REITs are usually the best starting point for new investors. They’re easy to buy and sell through a brokerage account, transparent in their reporting, and less risky than private or non-traded REITs. Broad REIT ETFs are also beginner-friendly, since they spread risk across many companies and real estate sectors with a single investment.
What is the difference between a REIT ETF and an individual REIT?
An individual REIT is a single company that owns or finances real estate, while a REIT ETF bundles dozens or even hundreds of REITs into one investment. With an ETF, you get instant diversification and less exposure to the performance of any one property type or company. Individual REITs can offer higher upside if you choose well, but they carry more concentrated risk.
Can REITs lose value?
Yes, like any investment, REITs can lose value. Property vacancies, falling rents, poor management, or changes in the economy can all push share prices down. Mortgage REITs in particular tend to be more volatile because they rely heavily on debt markets. While the income stream from dividends can soften losses, there’s no guarantee that the value of your REIT investment will always go up.
