Owning real estate is a classic way to build wealth, but buying property outright takes a lot of money and effort. REITs offer a way to invest in real estate without becoming a landlord, and you can buy them as easily as a stock. This guide from The Finance Reveal explains what a REIT is and how it works, part of our Investing section. This is general education, not investment advice, and investing involves risk, including the possible loss of principal.

What a REIT Is

A REIT, which stands for real estate investment trust, is a company that owns, operates, or finances income-producing real estate. Think of properties like apartment buildings, offices, shopping centers, warehouses, and increasingly things like data centers and cell towers. When you invest in a REIT, you are buying a share of that company, and therefore a slice of its real estate portfolio and the income it generates, without having to buy or manage any property yourself.

Many REITs are publicly traded on stock exchanges, which means you can buy and sell their shares just like you would a stock, giving you easy access to real estate as an asset class. A defining feature of REITs is that, to qualify for their special tax treatment, they are generally required to pay out most of their taxable income to shareholders as dividends. This is why REITs are often known for relatively high dividend payments, making them popular with investors seeking income, a use of the dividends our guide to how dividends work explains.

Why Investors Use REITs

REITs offer several appealing features. The table below summarizes them.

The main appeal is gaining exposure to real estate without the large sums, effort, and illiquidity of buying physical property. REITs also tend to pay attractive dividends because of the requirement to distribute most of their income, which makes them a favorite for income-focused investors. Publicly traded REITs offer liquidity that direct property ownership lacks, since you can buy or sell shares quickly on an exchange. And because real estate does not always move in lockstep with stocks and bonds, adding REITs can improve diversification within a portfolio, complementing the mix our guide to asset allocation describes. For a modest amount of money, REITs let ordinary investors participate in large-scale real estate they could never buy on their own.

How to Invest and What to Watch

Investing in REITs is straightforward. You can buy shares of an individual publicly traded REIT through a brokerage account, just as you would any stock, or you can invest in a REIT fund or ETF that holds many REITs at once for instant diversification across the sector, an approach similar to the funds our guide to index funds and ETFs covers. Buying a REIT fund spares you from having to analyze individual property companies and spreads your risk across many holdings.

As with any investment, REITs carry risks worth understanding. Their share prices can fall with the broader market and with the real estate sector specifically, and they can be sensitive to interest rates, since rising rates can pressure both property values and REIT prices. There is also a tax angle: REIT dividends are often taxed as ordinary income rather than at lower dividend tax rates, which can matter depending on the account you hold them in, so some investors hold REITs in tax-advantaged accounts. It is also worth distinguishing types: most REITs are equity REITs that own and operate properties, while mortgage REITs, which finance real estate, behave differently and carry their own risks. Overall, REITs are a convenient, accessible way to add real estate to your portfolio, best used thoughtfully as one part of a diversified plan suited to your goals and risk tolerance. For related basics, see our guide to how much money you need to start investing, and explore the full Investing section.

Frequently Asked Questions

What is a REIT?

A REIT, or real estate investment trust, is a company that owns, operates, or finances income-producing real estate such as apartments, offices, shopping centers, and warehouses. By buying shares in a REIT, you invest in a slice of its real estate and the income it generates without owning property yourself. Many REITs trade on stock exchanges, and they typically pay out most of their income to shareholders as dividends.

How do REITs make money for investors?

REITs generate income mainly from the rent and other revenue their properties produce, and because they are generally required to distribute most of their taxable income to shareholders, they often pay relatively high dividends. Investors can also benefit if the REIT’s share price rises over time. So returns typically come from a combination of dividend income and potential share-price appreciation, though prices can fall too.

How do I invest in a REIT?

You can buy shares of a publicly traded REIT through a brokerage account, just like any stock, or invest in a REIT fund or ETF that holds many REITs for instant diversification across the sector. A REIT fund spares you from analyzing individual companies and spreads risk across many holdings. Either way, REITs let you add real estate exposure to your portfolio for a relatively modest amount of money.

Are REITs a safe investment?

REITs offer diversification and income, but they are not risk-free. Their prices can fall with the broader market and the real estate sector, and they can be sensitive to interest rates, since rising rates may pressure property values and REIT prices. REIT dividends are also often taxed as ordinary income. Like any investment, REITs are best used thoughtfully as one part of a diversified plan suited to your goals and risk tolerance.

The Bottom Line

A REIT, or real estate investment trust, is a company that owns, operates, or finances income-producing real estate, letting you invest in property without the large sums and hands-on effort of buying it directly. By purchasing shares, you own a slice of the REIT’s real estate and the income it produces, and because many REITs trade on stock exchanges, you can buy and sell them as easily as a stock. A defining feature is that REITs generally must distribute most of their taxable income to shareholders, which is why they often pay relatively high dividends and appeal to income-focused investors. REITs offer real estate exposure, income, liquidity, and diversification beyond stocks and bonds, all for a modest amount of money. You can invest by buying an individual REIT through a brokerage or, for instant diversification, a REIT fund or ETF. Just keep the risks in mind: REIT prices can fall with the market and the real estate sector, they can be sensitive to interest rates, and their dividends are often taxed as ordinary income, which is why some investors hold them in tax-advantaged accounts. It also helps to know that most REITs own property, while mortgage REITs finance it and behave differently. Used thoughtfully as part of a diversified plan matched to your goals and risk tolerance, REITs are one of the most accessible ways to add real estate to your investments. For related guides, see our articles on how dividends work, asset allocation, and index funds and ETFs, and explore the full Investing section. This article is general information, not personalized investment advice, and investing involves risk, including the possible loss of principal.