How to Invest in Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) offer an accessible way to invest in real estate without owning a physical property. These investment vehicles pool capital from multiple investors to acquire, manage or finance income-producing real estate across the commercial, residential and industrial sectors.

If you’re interested in building a real estate portfolio, a financial advisor can help you analyze and manage investments.

How REITs Work

Established by Congress in 1960, REITs allow individual investors to earn a share of the income generated by commercial real estate ownership without having to buy, manage or finance entire properties. These properties generate rental income, which they then distribute to investors. By pooling capital, REITs give the average investor access to large-scale property portfolios.

To qualify as a REIT, a company must meet several requirements. This includes distributing at least 90% of its taxable income to shareholders annually in the form of dividends. The majority of REITs trade on major stock exchanges, combining the liquidity of stocks with the benefits of real estate investment. 

Types of REITs

Understanding these different types of REITs can help you develop an investment strategy that fits into your financial goals and risk tolerance.

Equity REITs

Equity REITs own and operate income-producing properties. Revenue comes from tenant rents, and the REIT’s value rises or falls with the underlying real estate.

• Opportunity: Rental income tends to grow over time, particularly in markets with strong demand and limited supply. This offers steady cash flow with the potential for the property itself to appreciate.
• Risk: Economic slowdowns can push vacancy rates higher and put pressure on rents. Property values themselves can decline during market downturns.

Mortgage REITs

Mortgage REITs don’t own buildings. They lend money to property owners or invest in mortgage-backed securities and collect interest on that debt.

• Opportunity: Yields on mortgage REITs tend to be higher than other REIT types because of the spread between what they pay to borrow and what they earn on their loan portfolios.
• Risk: Rising interest rates can squeeze that spread quickly, compressing margins and reducing payouts. Defaults on the underlying loans can also erode the portfolio’s value.

Hybrid REITs

Hybrid REITs blend both approaches, owning properties while also holding mortgage-related investments.

• Opportunity: Combining two revenue streams can balance income, since property rents and mortgage interest don’t always move in the same direction.
• Risk: Hybrid REITs inherit the vulnerabilities of both models without fully capturing the upside of either one.

Retail REITs

Retail REITs own shopping centers, malls and standalone retail locations.

• Opportunity: Tenants with long-term leases, especially essential businesses such as grocers and pharmacies, can provide dependable, predictable income.
• Risk: Consumer behavior continues to shift toward online purchasing, which has hit certain retail formats hard. REITs dependent on discretionary shopping tenants have faced particular pressure.

Residential REITs

Residential REITs hold apartment complexes, manufactured housing communities and single-family rental homes.

• Opportunity: Demand for housing tends to persist across economic conditions, giving these REITs a resilience that other property types may lack.
• Risk: Local rent regulations, periods of overbuilding and economic conditions that affect tenants’ ability to pay can all create headwinds.

Office REITs

Office REITs collect rent from corporate and professional tenants occupying office buildings.

• Opportunity: Long-term leases with creditworthy companies can produce steady, predictable cash flow over extended periods.
• Risk: The shift toward remote and hybrid work has reduced occupancy in many markets, and the long-term outlook for traditional office demand remains unclear.

Healthcare REITs

Healthcare REITs own hospitals, senior living facilities, skilled nursing centers and medical office buildings.

• Opportunity: Demographic trends, particularly an aging population, support sustained demand for these properties over the coming decades.
• Risk: Tenants operating these facilities are subject to regulatory changes, government reimbursement rate adjustments and staffing challenges that can affect their ability to meet lease obligations.

Industrial REITs

Industrial REITs focus on warehouses, fulfillment centers and logistics hubs.

• Opportunity: Growth in online retail and investment in supply chain infrastructure drives strong, sustained demand for these properties.
• Risk: Construction of new warehouse space has accelerated in recent years. If supply outpaces demand in certain regions, occupancy and rental rates could soften.

How to Invest in a REIT

Investors interested in REITs will find the process similar to other aspects of their investment portfolios. It is a research-driven decision that requires ongoing analysis and adjustment to reflect market changes in long-term financial goals.  

Step 1: Research REIT Options

Different REITs utilize different strategies, such as ownership, financing or hybrid. They often revolve around a specific category, such as residential or industrial properties.

As every portfolio is unique, investors must determine which opportunities are best for them. 

Step 2: Evaluate Performance and Risks

Due diligence is key.

Evaluate a REIT’s historical performance, dividend yields and growth potential. Pay particular attention to the management team’s track record and the REIT’s financial health. Assess the risks associated with the REIT, including market volatility and interest rate fluctuations.

Step 3: Choose a Brokerage Account

To invest in publicly traded REITs, you will need a brokerage account.

Choose a brokerage that offers access to a wide range of REITs and provides robust research tools. Some brokerages may also offer commission-free trades for REITs, which can help reduce your investment costs. 

Step 4: Make Your Investment

After setting up your brokerage account, determine how much to invest in your REIT.

You can then place your order through the brokerage platform. It will prompt you to specify the number of shares you wish to buy.

Step 5: Monitor and Rebalance

Investing in REITs requires ongoing attention.

Rebalance your portfolio as needed to maintain your desired asset allocation. This may involve buying more shares, selling underperforming REITs or diversifying into other real estate sectors or investment types.

How REIT Dividends Are Taxed

Taxes on REIT income differ from dividends on most other stocks. The difference is large enough to affect where you hold them and how much you keep after taxes.

REITs must distribute the bulk of their taxable income to shareholders. Because of that structure, most REIT dividends are taxed as ordinary income at your marginal tax rate.

This differs from dividends from most publicly traded companies. These often qualify for a lower preferential rate. For investors in higher tax brackets, this distinction can meaningfully reduce the net return.

Partial Offset

A partial offset is available under current law. Section 199A of the tax code allows many investors to deduct up to 20% of REIT dividends received. ¹ This, in turn, lowers the effective tax rate.

This deduction applies whether or not you itemize. However, income limits and phase-outs may affect eligibility depending on your filing status. The provision has an expiration date built into the law, so its availability going forward is not guaranteed.

Tax Rate

REIT distributions do not all have the same tax rate. Some are classified as capital gains, which use long-term rates instead of ordinary income rates.

Others are classified as return of capital. A return of capital distribution doesn’t create a tax bill when you receive it. Instead, it reduces your original purchase price for the shares on paper. When you sell those shares later, the gap between your adjusted purchase price and the sale price will be larger. This results in a bigger taxable gain at that point. Keeping track of how each year’s distributions are categorized is important for accurate reporting when you eventually exit the position.

Given that most REIT income faces ordinary tax rates, many tax professionals recommend placing REITs inside accounts like an IRA or 401(k), where distributions grow without an annual tax drag. That allows you to reinvest the full payout so it can compound over time.

The downside of that approach is that the Section 199A deduction is only available for REITs in taxable accounts. Therefore, you lose that benefit by sheltering them.

Whether it makes more sense to prioritize the deduction depends on your bracket, the size of your REIT holdings and how the rest of your portfolio is arranged across account types.

Bottom Line

Investing in REITs can allow you to earn regular income through dividends from real estate investments without the need to buy, manage or finance properties directly. REITs also offer portfolio diversification and potential for long-term capital appreciation, while being relatively liquid compared to physical real estate. However, their value and dividend payouts can be affected by interest rate fluctuations, and you must be prepared to pay taxes on dividends.

Tips for Real Estate Investments

• A financial advisor can help you create a personalized real estate portfolio for your goals and needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• A big part of real estate investing is getting the proper financing, especially if you’re looking to spread your cash across multiple investments. To estimate how much you might need to pay on financing, consider a free mortgage calculator.

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