What is a REIT?
A REIT (Real Estate Investment Trust) is a company that owns, operates, or finances income-producing real estate and is required to distribute at least 90% of its taxable income to shareholders as dividends. REITs were created by Congress in 1960 to give ordinary investors access to large-scale, diversified real estate portfolios without having to buy, manage, or finance properties directly.
For active real estate investors — flippers, landlords, wholesalers — understanding REITs matters less as an investment vehicle and more as context for understanding how institutional capital flows into real estate markets. REITs are among the largest buyers of commercial real estate in the country, and their acquisition and disposition activity directly affects property values and cap rates in every major market.
How REITs work
A REIT pools capital from many investors to purchase and manage a portfolio of real estate assets. The REIT collects rent from tenants, pays operating expenses and debt service, and distributes the remaining income to shareholders. Because REITs must distribute at least 90% of taxable income, they tend to pay higher dividends than most stocks — typically 3-8% annually.
In exchange for the 90% distribution requirement, REITs receive a significant tax benefit: they don't pay corporate income tax on the income they distribute. This eliminates the double taxation that affects regular corporations (where income is taxed at the corporate level and again when distributed as dividends to shareholders). The tax burden passes through to the individual shareholders, who pay tax on the dividends at their personal rate.
Types of REITs
Equity REITs own and operate properties. They generate revenue primarily from rents. This is the most common type, representing about 95% of REITs. Examples include office REITs, apartment REITs, industrial/warehouse REITs, retail/shopping center REITs, healthcare REITs, and data center REITs.
Mortgage REITs (mREITs) don't own properties. They invest in real estate debt — mortgages and mortgage-backed securities. Their income comes from the interest spread between the rate they earn on mortgage investments and their cost of borrowing. Mortgage REITs are more sensitive to interest rate changes and tend to be more volatile than equity REITs.
Hybrid REITs combine both strategies, owning properties and holding mortgage investments. They're less common than pure equity or mortgage REITs.
Public vs. non-traded REITs
Publicly traded REITs are listed on stock exchanges (NYSE, NASDAQ) and can be bought and sold like any stock. They offer complete liquidity — you can sell your shares any trading day. Prices fluctuate with the stock market, which means REIT share prices don't always reflect the underlying real estate value. Major publicly traded REITs include Prologis (industrial), AvalonBay (apartments), Simon Property Group (retail), and Equinix (data centers).
Non-traded REITs are registered with the SEC but not listed on exchanges. They offer limited liquidity (typically quarterly redemption programs with limitations), higher fees (upfront commissions of 5-10%), and longer time horizons. The theoretical advantage is that pricing is based on the underlying real estate value rather than stock market sentiment. However, the fee structures and liquidity limitations make non-traded REITs controversial, and many financial advisors recommend avoiding them in favor of publicly traded alternatives.
REIT requirements
To qualify as a REIT, a company must meet several IRS requirements: invest at least 75% of total assets in real estate, cash, or U.S. Treasuries; derive at least 75% of gross income from real estate-related sources; distribute at least 90% of taxable income to shareholders; be an entity taxable as a corporation; be managed by a board of directors or trustees; have at least 100 shareholders after its first year; and have no more than 50% of shares held by five or fewer individuals.
REITs vs. direct real estate investing
| Factor | REITs | Direct ownership |
|---|---|---|
| Minimum investment | Price of one share (~$10-$300) | Down payment ($20K-$100K+) |
| Liquidity | Sell anytime (public REITs) | Months to sell a property |
| Control | None | Full control |
| Leverage | Can't personally leverage | Can use mortgages |
| Tax benefits | Limited (dividends taxed as ordinary income) | Significant (depreciation, 1031 exchange) |
| Diversification | Instant (one REIT may own 100+ properties) | Concentrated in 1-10 properties |
| Management | Completely passive | Active (or hire management) |
Most active real estate investors don't invest in REITs as a primary strategy. The returns on direct ownership with leverage, tax benefits, and active management typically exceed REIT returns. But REITs serve a useful role for parking capital that isn't actively deployed in deals, for diversifying into property types or geographies you wouldn't invest in directly, and for maintaining real estate exposure inside retirement accounts that can't easily hold physical property.