Investing in real estate has long been a path to building wealth—but not everyone can afford to buy property or wants the hassle of being a landlord. That’s where REITs, or Real Estate Investment Trusts, come in.
REITs offer a simple way to invest in real estate through the stock market—making it possible to earn rental income and property appreciation without buying a single building.
In this beginner-friendly guide, we’ll explain what REITs are, how they work, the different types, and how to invest in them with confidence.
What Is a REIT?
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate. It collects rent or mortgage payments and distributes most of its profits to investors in the form of dividends.
Key facts:
- Traded on the stock exchange like regular stocks
- Required by law to pay at least 90% of taxable income to shareholders
- Allows everyday investors to own shares of large real estate portfolios
REITs are a way to invest in real estate without needing a down payment, tenants, or property maintenance.
Types of REITs
1. Equity REITs (Most Common)
- Own and operate physical properties
- Earn income from rent and property appreciation
- Includes apartments, malls, offices, hospitals, and more
2. Mortgage REITs (mREITs)
- Invest in mortgages and mortgage-backed securities
- Earn income from interest on those loans
- More sensitive to interest rate changes
3. Hybrid REITs
- Combine both equity and mortgage strategies
- Offer exposure to property ownership and lending
4. Public vs. Private REITs
- Publicly traded: Listed on stock exchanges (easy to buy/sell)
- Non-traded: Less liquid and harder to value
- Private REITs: For accredited investors only
For beginners, publicly traded REITs are the best place to start.
What Do REITs Invest In?
REITs often specialize in specific sectors:
| Sector | Example Properties |
|---|---|
| Residential | Apartments, condos, single-family rentals |
| Commercial | Office buildings, co-working spaces |
| Retail | Shopping centers, malls, supermarkets |
| Industrial | Warehouses, logistics centers |
| Healthcare | Hospitals, medical offices, senior housing |
| Data Centers | Server farms, tech infrastructure |
| Hospitality | Hotels and resorts |
Choosing a REIT based on a sector you understand or believe in can be a good strategy.
Pros of Investing in REITs
1. Passive Income
REITs pay regular dividends, making them a favorite for income-seeking investors.
2. Diversification
They allow you to diversify outside traditional stocks and bonds without buying real estate.
3. Liquidity
Unlike physical real estate, publicly traded REITs can be bought and sold quickly.
4. Accessibility
Start investing with as little as $10 using brokerages like Fidelity, Schwab, Robinhood, or Public.
5. Inflation Hedge
Real estate often performs well during inflationary periods as property values and rents rise.
Risks and Considerations
No investment is risk-free. Here’s what to watch for:
- Market volatility: Public REITs trade like stocks and can fluctuate.
- Interest rate sensitivity: Rising rates may hurt REIT performance.
- Tax treatment: REIT dividends are taxed as ordinary income (not qualified dividends).
- Sector-specific risks: A retail REIT may suffer if malls decline, for example.
Do your research and choose diversified or well-managed REITs to lower risk.
How to Start Investing in REITs
1. Buy Individual REIT Stocks
You can purchase shares of specific REITs on any brokerage platform.
Examples:
- Realty Income Corp (O)
- Prologis (PLD)
- Simon Property Group (SPG)
- Digital Realty Trust (DLR)
2. Invest Through REIT ETFs
Exchange-Traded Funds (ETFs) that hold multiple REITs offer instant diversification.
Popular REIT ETFs:
- Vanguard Real Estate ETF (VNQ)
- Schwab U.S. REIT ETF (SCHH)
- iShares U.S. Real Estate ETF (IYR)
3. Use Retirement Accounts
Hold REITs in a Roth IRA or 401(k) to avoid immediate taxation on dividends.
Tax Implications of REITs
- REIT dividends are taxed as ordinary income, not as capital gains.
- Holding REITs in a tax-advantaged account (like an IRA) can reduce your tax burden.
- Some REITs offer return of capital distributions—consult a tax advisor for details.
Final Thoughts: Real Estate Without the Hassle
REITs make real estate investing simple, affordable, and accessible for everyday Americans. Whether you want monthly income, diversification, or exposure to a booming sector, REITs offer a smart way to do it without needing to buy property yourself.
Start small, reinvest your dividends, and let the power of passive income work for you over time.