REITs for Beginners: Types, Requirements and How to Get Started

Real estate has long been one of the most reliable paths to building wealth. It’s also among the most difficult. Becoming a property owner requires enormous upfront capital, dealing with difficult tenants, and navigating endless maintenance headaches. Real Estate Investment Trusts, or REITs, change that equation entirely. These allow you to invest in large-scale real estate portfolios for the cost of a single share of stock.

If real estate is part of your wealth-building plan, a financial advisor can show you how REITs fit alongside other investments, retirement accounts and your tax situation to get the most out of your allocation.

How Does a REIT Work?

A REIT operates by pooling capital from numerous investors to purchase and manage income-producing real estate properties. Instead of buying a single property yourself, you can purchase shares in a REIT. The REIT may own dozens or even hundreds of properties, from office buildings and shopping centers to apartments and warehouses. The REIT collects rent, pays expenses, and distributes the remaining income to shareholders in the form of dividends.

What makes REITs particularly attractive is their special tax status under federal law. To qualify as a REIT, a company must distribute at least 90% of its taxable income as dividends each year. ¹ In exchange, the REIT itself doesn’t pay corporate income tax on the earnings it distributes. This avoids the double taxation that typically affects corporations and their shareholders.

REITs employ professional management teams who handle the day-to-day operations of their properties. This includes tenant relations, maintenance, lease negotiations, and strategic acquisitions or sales. When you invest in a REIT, you’re essentially hiring these experts to manage the headaches of being a landlord. The REIT generates revenue primarily through rental income, though some also profit from property appreciation when they sell assets at higher prices than their purchase cost.

Types of REITs

REITs come in various forms, each offering different investment characteristics, liquidity levels, and access to specific real estate sectors. Understanding the main categories can help you choose the right type of REIT for your portfolio and risk tolerance.

Equity REITs

• How it works: Own and operate income-producing properties like apartments, office buildings and warehouses, generating revenue primarily through rent collected from tenants.
• Opportunity: Exposure to real estate appreciation and a steady income stream across multiple property sectors.
• Risk: Property vacancies, rising operating costs and economic downturns can reduce rental income and affect distributions.

Mortgage REITs (mREITs)

• How it works: Invest in real estate debt rather than physical properties, earning income from the interest on mortgages and mortgage-backed securities.
• Opportunity: Can offer higher dividend yields than equity REITs, making them attractive to income-focused investors.
• Risk: Profits depend on the spread between borrowing costs and interest earned, so rising interest rates can compress margins and reduce returns quickly.

Hybrid REITs

• How it works: Combine property ownership with mortgage investments, spreading exposure across both real estate equity and debt.
• Opportunity: The mixed structure can reduce the impact of any single market force on overall performance.
• Risk: Harder to analyze than a pure equity or mortgage REIT, requiring investors to assess both the property portfolio and the debt holdings separately.

Publicly Traded REITs

• How it works: Listed on major stock exchanges, allowing investors to buy and sell shares at market prices on any trading day under SEC oversight.
• Opportunity: The most transparent and accessible REIT option for individual investors, with daily liquidity and required disclosures.
• Risk: Prices can be volatile and may move with broader stock market sentiment rather than underlying real estate values.

Private REITs

• How it works: Not registered with the SEC and available only to accredited investors, with fewer disclosure requirements than public REITs.
• Opportunity: Can offer access to institutional-quality real estate deals not available on public markets.
• Risk: Highly illiquid with no secondary market, and limited transparency makes independent evaluation of performance and fees difficult.

Requirements to Qualify as a REIT

To qualify as a REIT under IRS regulations, a company must invest at least 75% of its total assets in real estate, cash, or U.S. Treasuries. ² This ensures that REITs remain focused on real estate investment rather than diversifying into unrelated businesses.

Additionally, at least 75% of the REIT’s gross income must come from real estate-related sources. This includes rents, mortgage interest, or gains from property sales. A total of 95% of gross income must come from these real estate sources plus dividends and interest from any source.

Perhaps the most significant requirement is the mandatory income distribution rule that defines the REIT structure. A REIT must distribute at least 90% of its taxable income to shareholders annually in the form of dividends. This requirement is what creates the tax advantages and high dividend yields that attract investors. However, it also means REITs retain relatively little capital for internal growth. They often need to raise money through debt or additional share offerings to fund new acquisitions.

A REIT must be structured as a taxable corporation with transferable shares. It must be managed by a board of directors or trustees. Also, it must have at least 100 shareholders after its first year of operation. This ensures broad ownership rather than concentration among a few investors. Furthermore, no more than 50% of the REIT’s shares can be held by five or fewer individuals during the last half of each taxable year. This rule prevents REITs from becoming tax shelters for wealthy investors. ³

How to Invest in REITs

The most straightforward way to invest in REITs is through a standard brokerage account. You can buy shares of publicly traded REITs just like you would purchase any other stock. Major brokerage platforms like Fidelity, Charles Schwab, Vanguard, and others list hundreds of REITs. You’ll find options across a range of property sectors and geographic regions.

If you prefer a more diversified approach without selecting individual REITs, consider mutual funds and exchange-traded funds (ETFs) that focus on real estate. These provide instant exposure to dozens or even hundreds of REITs in a single investment. These funds handle the selection and rebalancing of REIT holdings, saving you time if you lack the expertise required to evaluate individual companies.

Many investors hold REITs within tax-advantaged retirement accounts like 401(k)s and IRAs. This can be a smart strategy given REITs’ high dividend distributions. Since REIT dividends are generally taxed as ordinary income rather than at the lower qualified dividend rate, holding them in a traditional IRA or 401(k) allows you to defer taxes until retirement, while a Roth IRA shields those dividends from taxes entirely.

Risks to Consider Before Investing in a REIT

REITs are notably sensitive to changes in interest rates, which can significantly impact their share prices and attractiveness to investors. When interest rates rise, the fixed-income dividends that REITs pay become less appealing compared to newly issued bonds offering higher yields, often causing REIT prices to decline. Additionally, higher interest rates increase borrowing costs for REITs that use debt to finance property acquisitions or improvements, potentially reducing their profitability and ability to maintain dividend payments.

Although REITs provide exposure to real estate, their stock prices can be just as volatile as other equities, especially during broader market downturns or economic recessions. Unlike owning physical property where you might not check values daily, publicly traded REIT prices fluctuate constantly based on investor sentiment, earnings reports, and economic data.

While REIT dividends can be attractive, they’re typically taxed as ordinary income rather than at the lower qualified dividend tax rate, meaning you could pay a higher tax bill compared to dividends from traditional stocks. This makes tax planning crucial, especially for investors in higher tax brackets who might benefit from holding REITs in retirement accounts.

Bottom Line

REITs offer an accessible and potentially lucrative way for everyday investors to gain exposure to income-producing real estate without the capital requirements, management headaches, or illiquidity of direct property ownership. By law, these companies must distribute at least 90% of their taxable income as dividends, making them attractive for income-focused investors, while their availability on major stock exchanges provides flexibility that physical real estate cannot match. A financial advisor can tell you more about diversifying your portfolio to include more real estate assets.

Investment Planning Tips

• If you are considering REITs as part of your portfolio, a financial advisor can help you weigh the tax treatment of REIT dividends, size your allocation and decide whether public or private options make sense for your portfolio. 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.
• For investors looking beyond REITs, these 13 investment types cover a range of options worth considering as you build a diversified portfolio.
• If you want to know how much your money could grow over time, SmartAsset’s investment calculator could help you get an estimate.

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