A REIT (real estate investment trust) is a company that owns, operates, or finances income-producing real estate and distributes most of its taxable income to shareholders as dividends—letting individual investors gain liquid, stock-like exposure to property markets without buying or managing buildings directly.
REIT stands for Real Estate Investment Trust. In the U.S., to qualify as a REIT a company must meet several rules (examples): invest at least 75% of assets in real estate, derive at least 75% of gross income from real-estate sources (rent, mortgages, sales), and distribute at least 90% of its taxable income to shareholders as dividends. Meeting these tests generally lets the REIT avoid corporate-level tax on qualifying income.
REIT returns come from three main channels: (1) rental or lease income and net operating income (NOI) distributed as dividends; (2) property value appreciation realized on sales or reflected in NAV; and (3) interest income for mortgage REITs that hold real-estate debt. Public REITs also offer capital gains/losses via share-price moves.
Common REIT sectors include:
Sectors perform differently depending on fundamentals: industrial and data centers benefit from e-commerce and cloud demand; retail depends on consumer spending and in-person traffic; office depends on employment and remote-work trends; healthcare depends on demographics and reimbursement rates. Sector supply/demand, rent growth, tenant credit, and duration of leases drive cash flow stability and valuation.
Pros: instant diversification across many REITs/sectors, lower single-stock risk, easy trading and tax-efficient ETFs. Cons: less control over sector exposure, possible overlap with broader portfolios, management fees (ETF fees are usually low but vary).
These can require high minimum investments, carry front-loaded or ongoing fees, and have long lock-up periods or redemption limits. They can offer different return profiles but suit only investors comfortable with illiquidity and limited transparency.
Holding REIT stocks or REIT ETFs inside an IRA or 401(k) can defer taxes on dividends and capital gains. Beware of unrelated business taxable income (UBTI) rules for certain leveraged private REIT holdings in tax-advantaged accounts.
FFO (Funds From Operations) adjusts net income by adding back real-estate depreciation and excluding gains/losses from property sales—providing a clearer picture of recurring cash flow. AFFO (Adjusted FFO) further adjusts for capital expenditures and maintenance capex to estimate distributable cash more accurately. Simple note: FFO ≈ Net Income + Depreciation & Amortization − Gains on Sales; AFFO = FFO − Recurring Capex − Straight‑lining adjustments (methods vary).
NAV estimates the market value of a REIT’s properties minus liabilities divided by shares outstanding. Price-to-NAV compares market capitalization to NAV; discounts or premiums indicate investor sentiment vs. underlying asset value.
Dividend yield = annual dividend / share price. Payout ratio vs FFO or AFFO shows sustainability: a payout above FFO/AFFO can signal distribution risk. Coverage ratios (FFO per share ÷ dividend per share) below 1.0 indicate dividends may exceed core earnings.
Common leverage measures: debt-to-assets or debt-to-equity (shows how much debt finances assets) and interest-coverage ratio (EBITDA or NOI/interest expense). Lower leverage and stronger interest coverage reduce refinancing and default risk—important in rising-rate environments.
The ~90% distribution requirement avoids corporate tax but forces REITs to return cash to shareholders rather than reinvesting—this encourages external capital raising (equity or debt) for growth and influences payout policies.
Most REIT dividends are taxed as ordinary (non‑qualified) income for individual investors, though part may be treated as return of capital (reducing cost basis) or qualified capital gains if funded by property sale. Tax treatment varies—consult a tax professional for personal situations.
Other countries have different qualifying tests, distribution rates, withholding taxes for foreign investors, and local tax rules—so cross-border REIT investing requires checking local regulations and treaties.
Good fit: investors seeking income, inflation-linked cash flows (certain sectors), and diversification. Not a good fit: investors needing principal protection, those who want direct property control, or investors who cannot tolerate dividend tax treatment.
| Item | REITs (public) | Direct rental property |
|---|---|---|
| Control | Low (professional mgmt) | High (you make decisions) |
| Leverage | Corporate-level moderate/high (management controls) | Investor-controlled (mortgages), can use higher personal leverage |
| Liquidity | High (exchange-traded) | Low (property sales take time) |
| Tax | Dividends often taxed as ordinary; easier in taxable accounts | Depreciation, 1031 exchanges, pass-through benefits; more complex |
| Hands-on work | Minimal | Significant (management, repairs, tenants) |
Higher interest rates raise borrowing costs for REITs and can reduce NAVs via higher cap rates. mREITs are especially sensitive to rate changes because they rely on interest spreads; equity REITs are affected when refinancing costs rise or when investor demand shifts from dividends to fixed-income yields.
Economic expansion boosts demand for offices, retail, and industrial space; recessions can depress occupancy and rents. Inflation can benefit property owners with inflation-indexed leases or frequent rent resets, but high inflation plus rising rates can compress valuations.
Most REIT dividends are taxed as ordinary (non‑qualified) income rather than qualified dividend income. Some portion may be return of capital or capital gains; check the annual 1099-DIV and consult your tax advisor.
Decide by your income needs, risk tolerance, and convictions about sector trends: choose sectors with strong fundamentals (e.g., industrial/data centers in e-commerce/cloud cycles) or buy a diversified REIT ETF if you prefer broad exposure and lower single-stock risk.
FFO adjusts net income for property depreciation and sales gains/losses to show recurring cash flow; AFFO further adjusts for maintenance capex to estimate cash available for dividends.
Yes—public REIT stocks and ETFs trade like other securities and can be bought in brokerage accounts and IRAs with no special minimums beyond your broker’s trade requirements. Private REITs typically have high minimum investments and accreditation limits.
Non-traded REITs are registered but not exchange-listed, offering less liquidity and often higher fees. They may suit long-term accredited investors seeking illiquid real-estate exposure, but they require careful due diligence on fees, valuations, and redemption policies.
Jane reads that “Company X named a REIT” and wonders what that means. Step-by-step: (1) She recognizes a REIT owns/operates income properties and pays most earnings as dividends. (2) She checks the sector (e.g., data centers) to see demand drivers. (3) She looks up the REIT’s yield, FFO trends, leverage and occupancy. (4) She decides whether to research further, buy a few shares, or prefer a sector ETF for diversification.
REITs are companies that own or finance income-producing real estate and distribute most of their taxable income as dividends—providing a liquid, professionally managed way to invest in property. They vary by business model and sector, carry both attractive income and interest-rate risk, and require attention to FFO, leverage, occupancy, and dividend coverage.
Suggested next steps: read industry primers on REIT investing, follow Nareit materials, take real-estate investment courses on major platforms, and build a simple FFO/AFFO spreadsheet to track coverage and payout sustainability. Use SEC filings and fund fact sheets as primary inputs when modeling a REIT.
