What Is a REIT?
What Is a REIT?
A REIT is a company that owns, finances, or operates income-producing real estate assets and passes nearly all of its taxable income to shareholders as distributions. The structure allows individual investors to own real estate indirectly without buying property directly, managing tenants, or dealing with mortgages and maintenance.
Key takeaways
- A REIT is a tax-deferred pass-through vehicle that owns or finances real estate and distributes 90% of taxable income to shareholders.
- REITs trade on public exchanges like stocks, offering liquidity that direct property ownership does not provide.
- The REIT structure was created by Congress in 1960 to democratize real estate investing for ordinary investors.
- REIT distributions come from operating income, capital gains, and sometimes return of capital—each taxed differently.
- You can build a diversified real estate portfolio through REITs with any brokerage account, starting with as little as one share.
The REIT structure
A REIT is a corporation, trust, or partnership that meets strict IRS criteria. The most important requirement is that it must distribute at least 90% of its taxable income to shareholders as dividends. This pass-through structure means the REIT itself pays no federal income tax—the tax liability passes to shareholders instead. In exchange for this preferential treatment, REITs must comply with rules about asset composition (at least 75% of assets must be real estate or mortgages), income sources (at least 75% of income from rents or interest), and share structure (at least 100 shareholders, no more than 50% owned by five or fewer people).
The REIT concept was invented by Congress in 1960 as a way to allow individual investors to participate in real estate markets without the capital requirements and operational burdens of direct ownership. Before REITs, large institutional investors and REICs (real estate investment clubs) dominated property ownership. The legislation democratized the asset class by packaging professional property management, leverage, and diversification into a tradeable security.
How REITs differ from property ownership
Direct property ownership and REIT ownership are fundamentally different animals. When you buy a rental house or apartment building, you own the physical asset, control its management, claim depreciation deductions, and can leverage borrowed money to amplify returns. You also bear all the operational risk: vacancy, bad tenants, repairs, liability, and the illiquidity of selling real property—a process that typically takes three to six months.
A REIT, by contrast, gives you fractional ownership in a professionally managed portfolio of properties without any of the operational hassle. You receive distributions, not rental income you have to collect. Your investment is liquid—you can sell your shares in seconds during market hours. But you lose direct control, cannot claim depreciation on your tax return, and cede all management decisions to the REIT's board and executive team. The REIT receives the depreciation benefit, not you, which is why REIT distributions are often taxed as ordinary income rather than capital gains.
Types of REITs by structure
The most common type is the equity REIT, which owns and operates real estate directly. Equity REITs collect rents, manage properties, and reinvest or distribute the proceeds. The second major type is the mortgage REIT, which acts as a lender. Instead of owning buildings, mortgage REITs finance property acquisitions and hold the mortgages, collecting interest payments. A smaller category is the hybrid REIT, which does both—owns some properties and finances others. Your choice between equity and mortgage REITs depends on your goals and risk tolerance. Equity REITs tend to be less volatile and more aligned with long-term real estate appreciation. Mortgage REITs are more sensitive to interest rate changes and often distribute higher yields, but with more volatility.
Who owns and manages a REIT
A REIT is run by a board of directors and management team, just like any public company. Large REITs like Prologis (a global industrial REIT with over $100 billion in assets) employ hundreds of people—acquisitions specialists, asset managers, engineers, leasing professionals, and finance staff. Smaller REITs may have lean teams that outsource operations to third-party property managers. Institutional investors (pension funds, insurance companies, endowments) typically own a large portion of most REITs. Retail investors own the remainder. The REIT's success depends on its management's ability to select, acquire, manage, and exit properties profitably. Unlike a passive index fund, a REIT's performance reflects both the underlying real estate market and the skill of its operators.
Tax treatment of REIT distributions
When a REIT distributes 90% or more of its taxable income, shareholders owe federal income tax on those distributions—usually at ordinary income rates. This is very different from qualified dividend income (which can be taxed at long-term capital gains rates). Some REIT distributions may include long-term capital gains or return of capital, which are taxed more favorably, but the bulk is ordinary income. This makes REITs most tax-efficient in tax-deferred accounts like 401(k)s, traditional IRAs, Roth IRAs, and HSAs. In a taxable account, REIT distributions create an ongoing tax drag that can meaningfully reduce your after-tax return. Many financial advisors recommend holding REITs in tax-advantaged space when possible.
Why REIT distributions are high
Because REITs must distribute 90% of taxable income, they typically yield much more than stocks. As of early 2025, broad REIT indices often yield 3% to 5% annually, compared to 1% to 2% for the S&P 500. This higher yield does not necessarily mean higher total return—the payout leaves less cash for reinvestment and growth. Some of the yield is a return of your own capital, not economic profit. But for investors in tax-deferred accounts or seeking income, the REIT distribution is the primary way you access the real estate return. The real estate asset itself may appreciate or depreciate, and that capital gain or loss is embedded in the REIT's share price.
The REIT universe today
The U.S. REIT market includes hundreds of companies ranging from tiny regional players to massive global operators. The largest REIT indices track groups of 100 to 200 companies covering every property type: residential apartments, single-family homes, shopping centers, office buildings, industrial warehouses, data centers, cell towers, healthcare facilities, hospitality, self-storage, and more. Many international markets also have REIT-like structures: Canada has REITs, the U.K. has REITs, Australia has listed property trusts, and France has SIICs. If you want broad exposure to the U.S. REIT market, low-cost index funds like VNQ (Vanguard Real Estate ETF) and SCHH (Schwab U.S. REIT ETF) offer diversification across hundreds of companies for under 0.15% in annual fees.
Flowchart: Anatomy of a REIT
Next
REITs come in many varieties—equity, mortgage, and hybrid structures—and they concentrate on different property types and geographies. The next article examines the single most important rule that makes the whole REIT system work: the requirement to distribute 90% of taxable income to shareholders, and why that threshold fundamentally shapes how REITs operate and compete.