What Is a REIT? Investing in Real Estate Without Buying Property
Learn what a REIT is, how it lets you invest in real estate through the stock market, and the trade-offs compared to owning property directly.
Real estate has long been considered a popular way to build wealth, but buying property directly requires significant capital, ongoing management, and isn’t easy to sell quickly if you need the money. A REIT offers a way to invest in real estate without any of that.
What is a REIT?
A REIT (Real Estate Investment Trust) is a company that owns, operates, or finances income-producing real estate — office buildings, apartment complexes, shopping centers, warehouses, data centers, and more. Shares of publicly traded REITs are bought and sold on stock exchanges just like regular stocks, giving investors a way to gain exposure to real estate without directly owning or managing property themselves.
By law, in the U.S., REITs are required to distribute at least 90% of their taxable income to shareholders as dividends, which is why REITs are generally known for relatively high dividend yields compared to many other types of stocks.
Types of REITs
- Equity REITs: Own and operate physical real estate directly, earning income primarily through rent. This is the most common type.
- Mortgage REITs: Provide financing for real estate by purchasing or originating mortgages, earning income from interest rather than rent.
- Specialty REITs: Focus on specific property types like data centers, cell towers, healthcare facilities, or self-storage — sectors that have grown in popularity as distinct REIT categories in recent years.
REITs vs. buying property directly
| REITs | Direct property ownership | |
|---|---|---|
| Capital required | Can start with the price of a single share | Typically requires a large down payment |
| Liquidity | Can be bought/sold on an exchange during market hours | Can take weeks or months to sell |
| Management | Professionally managed, no landlord responsibilities | Requires active management (or hiring a property manager) |
| Diversification | Easy to hold many properties across many locations via one investment | Concentrated in whatever specific properties you own |
| Dividend income | Required to distribute most taxable income as dividends | Rental income depends entirely on your own property’s occupancy |
Why some investors include REITs in a portfolio
- Diversification: Real estate doesn’t always move in the same direction as stocks and bonds, so REITs can offer diversification benefits within a broader portfolio, though they aren’t immune to market-wide downturns.
- Income: The dividend requirement makes REITs a common choice for investors seeking regular income, similar to the reasoning covered in our dividends guide.
- Accessibility: REITs let investors with modest amounts of money gain exposure to large-scale commercial real estate that would otherwise be completely out of reach.
Risks to understand
- Interest rate sensitivity: REITs often rely on borrowed money to finance properties, making them sensitive to changes in interest rates — rising rates can increase borrowing costs and sometimes pressure REIT share prices.
- Sector-specific risk: A REIT concentrated in one property type (like office space) can be significantly affected by trends specific to that sector, such as shifts toward remote work reducing demand for office space.
- Not risk-free income: While REITs are known for dividends, those dividends aren’t guaranteed and can be reduced if the underlying properties underperform.
- Taxation of dividends: REIT dividends are often taxed differently than qualified stock dividends, sometimes at a higher rate in a standard taxable account — worth understanding or discussing with a tax professional, particularly for larger holdings.
How to invest in REITs
Most investors gain REIT exposure through:
- Individual publicly traded REITs, bought like any other stock through a brokerage account.
- REIT-focused ETFs or mutual funds, which hold a diversified basket of many REITs across different property types, reducing single-company risk — similar in principle to the diversification benefits covered in our index funds guide.
Non-traded REITs also exist, but they come with less liquidity and less transparency than publicly traded options, and generally require more caution and due diligence.
The short version
- REITs let you invest in real estate through the stock market, without directly owning or managing property.
- They’re required to distribute most of their taxable income as dividends, making them a common income-focused investment.
- REITs carry their own risks, including interest rate sensitivity and sector-specific downturns.
- A REIT-focused ETF offers diversified real estate exposure without needing to research individual REIT companies.
This is general education, not advice built around your specific situation. See the disclaimer for more.
Start Investing Simple Team
Part of the Start Investing Simple team, writing beginner-friendly guides to investing and personal finance. More about us →