Real Estate Investment Trust (REIT)
A REIT is a company that owns or finances income-producing real estate. Learn how REITs work, types, and investment benefits.
Definition
A real estate investment trust (REIT) is a company that owns, operates, or finances income‑producing real estate across various sectors, such as residential, commercial, industrial, and healthcare. To qualify as a REIT under U.S. tax law, the company must distribute at least 90% of its taxable income to shareholders as dividends and invest at least 75% of its assets in real estate. REITs trade on major stock exchanges and offer investors exposure to real estate without directly owning property. Benefits include dividend income, diversification, and liquidity, while risks involve market volatility and interest rate sensitivity.
Why It Matters
Owning REIT shares is nothing like owning a rental, even though both get called real estate. The 90 percent distribution rule generates large dividends that are usually taxed as ordinary income rather than at qualified rates, so the account you hold them in changes your actual return. Share prices also fall when rates rise, often while the house down the street holds steady.
Examples
Fifty thousand dollars in a listed apartment REIT yielding 4.2 percent pays about $2,100 a year, taxed at the investor's marginal rate unless the shares sit inside an IRA.
A non-traded REIT caps redemptions at 5 percent of net asset value per quarter. Investors rush the exit during a downturn, the gate closes, and money stays locked up.
A homeowner with $180,000 of home equity and no other property decides against a REIT, since their net worth already rides on one house in one metro.
Tips
Hold REITs inside an IRA or 401(k) wherever possible. The dividends are largely nonqualified, and that tax drag is the biggest single difference in long-run return.
Sort listed REITs from non-traded ones before comparing yields. Non-traded funds often carry 7 to 10 percent in upfront costs and have no daily market price.
Look at the sector before the yield. Office, retail, industrial and healthcare REITs behave nothing alike, and a headline yield over 8 percent usually means the market is betting against that sector.
Related Terms
Investment Property
An investment property is purchased to generate income or appreciate. Understand financing, tax bene...
Owner Financing
Owner financing occurs when sellers finance the sale for the buyer. Discover benefits, risks, and co...
Multi-Family Housing
Multi-family housing includes duplexes, triplexes, and apartment buildings. Learn ownership types, f...
Ready to Use Your Real Estate Knowledge?
Now that you understand Real Estate Investment Trust (REIT), let Wayber help you navigate your real estate journey. Our flat-fee service saves you thousands while providing expert guidance.