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Account & Regulation

REIT

A Real Estate Investment Trust: a company that owns income-producing real estate and trades like a stock. Required to pay out at least 90% of taxable income as dividends, which makes REITs popular for income investors.

What is a REIT?

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances real estate that produces income. REITs let individual investors gain exposure to real estate without buying property directly. Most publicly traded REITs trade on major stock exchanges, so you can buy and sell them just like any other stock.

Key features

  • 90% dividend rule: to qualify as a REIT and keep its favorable tax status, a company must distribute at least 90% of its taxable income to shareholders as dividends
  • High dividend yields: because of that rule, REITs typically pay dividend yields well above the broader market
  • Pass-through taxation: REITs themselves avoid corporate income tax on distributed earnings. The shareholder pays tax at their own rate
  • Dividend tax treatment: most REIT dividends are taxed as ordinary income, not at the lower qualified dividend rate. Holding REITs in a Roth IRA or Traditional IRA avoids this drag
  • Real estate exposure without the hassle: no property management, no tenants, no closing costs

Types of REITs

  • Equity REITs: own physical properties (offices, apartments, malls, warehouses, data centers, cell towers, hospitals) and earn rent
  • Mortgage REITs (mREITs): own mortgages and mortgage-backed securities, earn interest. Much more sensitive to interest rates
  • Hybrid REITs: a mix of both
  • Public vs. non-traded: publicly traded REITs list on exchanges and are easy to buy and sell. Non-traded REITs are private, illiquid, and often carry high fees

How to invest

Most investors access REITs through an index fund or ETF like VNQ (Vanguard Real Estate) or SCHH (Schwab US REIT), which hold dozens of REITs in one package. For concentrated exposure, individual REITs like PLD (Prologis), AMT (American Tower), or O (Realty Income) trade like regular stocks.

REITs are the easiest way for most investors to add real estate to their portfolio. For tax efficiency, hold them in a retirement account whenever possible.

Related Terms

Certificate of Deposit

A time deposit at a bank or credit union that pays a fixed interest rate for a set term. FDIC-insured up to the standard limit and lower risk than most investments, but with early withdrawal penalties.

ETF (Exchange-Traded Fund)

A fund that trades on an exchange like a stock, holding a basket of assets such as stocks, bonds, or commodities. SPY and QQQ are ETFs.

Index Fund

A mutual fund or ETF designed to track a specific market index, such as the S&P 500. Low fees, broad diversification, and historically better long-term returns than most actively managed funds.

Money Market Fund

A type of mutual fund that invests in short-term, low-risk debt like Treasury bills and commercial paper. Used as a cash-equivalent place to park money with a higher yield than a typical bank account.