A Beginner's Guide to Real Estate Investment Trusts (REIT)

If you’ve ever wanted to invest in real estate but don’t have the time (or the millions) to buy properties outright, real estate investment trusts (REIT) might be the gateway you’re looking for. But before diving in, you’re probably wondering: what is REIT and why are so many investors talking about it? In simple terms, REITs let everyday investors put money into large-scale real estate projects without having to manage a single tenant. This beginner’s guide will break down how REITs work, why they’ve become a popular investment vehicle, and what you need to know before adding them to your portfolio.

Table of Contents

What Is a REIT?

What Assets Do REITs Own?

How Do REITs Work?

Why Invest in REITs?

REIT Fees & Taxes

Key REIT Metrics

Types of REITs

REIT Performance and Historical Returns

How To Buy and Sell REITs

REIT Pros

REIT Cons

REITs for Beginners: Essential Investment Tips

Avoiding Fraud in REIT Investments

Popular Best-Forming REITs

How Does A Company Qualify as a REIT?

What Is a REIT?

REITs or real estate investment trusts are shares of real estate companies investors can buy. By investing in REITs, investors indirectly invest in real estate. Since you own a fraction of the company, you own the real estate they invested in, but you don't have to do any of the work a landlord would do.

REITs sometimes invest in the equity side of commercial properties, such as apartment buildings, office buildings, and retail real estate. They can also invest in the debt side of real estate investing, acting as the lender for real estate developers or builders, helping them finance real estate. These are called mortgage REITs.

Both equity REITs and mortgage REITs may pay dividend income. It depends on the type of investment and how the REIT handles them. Some REITs pay dividend income monthly, quarterly, or annually yet others reinvest the money back into the investment until maturity.

What Assets Do REITs Own?

REITs own a variety of income producing real estate. Many REITs have a niche, such as buying undervalued apartment buildings or retail real estate. Others, however, may diversify their investments in a variety of income producing real estate, including:

• Medical centers and hospitals
• Shopping malls
• Hotels
• Apartment buildings
• Warehouses
• Data centers

In the case of mortgage REITs, the asset is the mortgage that the REIT funded. The real estate assets the funds paid for are the collateral. If the borrower defaults on the mortgage REIT, the company can take possession of the commercial real estate and sell it, distributing the proceeds to investors.

How Do REITs Work?

REITs are required to pay out 90% of their profits to shareholders. They do this by making real estate investments that produce income, aka pay rental income. This is taxable income investors earn, but it's an easier way to invest in commercial real estate without requiring a lot of money or the responsibility of owning real estate yourself.Man explaining to

You pay a fraction of the total asset when investing in either equity REITS or mortgage REITs. You invest alongside other investors, and the REIT pools the funds to cover the cost of buying the real estate or funding the mortgage loan.

Why Invest in REITs?

Real estate properties are typically a good way to diversify a portfolio. While there's no guarantee of a positive return, diversifying your portfolio with publicly traded REITs can offset the risk of investing only in the stock market.

REITs can perform well and many pay shareholder dividends can potentially give you a regular income that you can withdraw and/or reinvest. This steady cash flow is one of the main reasons investors consider them attractive compared to traditional stocks that may not pay dividends at all.

On top of that, real estate assets have a long history of long-term capital appreciation, which may provide a decent return on your investment. Pair that with the fact that REITs are generally more accessible and you get exposure to high-value properties without needing to manage them yourself.

So, are REITs a good investment? For many beginners and seasoned investors alike, the answer is yes—especially if your goal is to balance income with long-term growth while reducing reliance on the ups and downs of the stock market alone.

REIT Fees & Taxes

Understanding the taxes and fees of any investment is important to determine if it's a smart financial decision. While you can offset the taxable income produced by REITs by investing in them with your IRA or Roth IRA, any money invested with taxable funds is subject to ordinary income tax.

As far as fees, you should always read the fine print. Most companies owning income producing real estate and offering REITs charge a percentage of your assets under management per year, but there could also be early redemption fees and other miscellaneous fees you might owe.

Learn more about the 6 great REIT advantages. 

Key REIT Metrics

Before investing in real estate investment trusts, it’s important to know how to evaluate them. Just like stocks have earnings per share (EPS) or price-to-earnings ratios (P/E), REITs have their own set of unique metrics that help you measure performance and potential returns. Here are the most important ones:

Funds From Operations (FFO)

Instead of using net income, investors look at FFO because it adjusts for non-cash expenses like depreciation. This gives you a clearer picture of how much money a REIT is really making from its properties.

Adjusted Funds From Operations (AFFO)

Think of this as the “refined” version of FFO. AFFO subtracts recurring expenses (like maintenance and tenant improvements) to show a more realistic estimate of the cash available for dividends.

Net Asset Value (NAV)

NAV represents the value of a REIT’s assets minus its liabilities. Comparing NAV to the market price of a REIT’s shares can help you see if it’s trading at a premium (expensive) or discount (potentially undervalued).

Occupancy Rates

A REIT’s revenue depends on how many of its properties are occupied. Higher occupancy usually signals stable income and well-managed assets.

Dividend Yield

Since many investors buy REITs for income, dividend yield is crucial. It tells you how much income you’ll earn relative to the price you paid for the REIT’s shares.

Debt-to-Equity Ratio

Like any company, REITs can take on debt to grow. A reasonable level of debt-to-equity ratio can fuel expansion, but too much may add unnecessary risk especially in volatile interest rate environments. 

Types of REITs

There are a few types of REITs that are handled differently. Understanding how they are funded, managed, and the real estate property types they invest in can help you determine which might be right for you.

Publicly Traded

Publicly traded equity REITs are traded on the national stock exchange, such as the NYSE. Shares trade during regular trading hours and are regulated by the SEC. They are the more liquid way to invest in the real estate market since you can buy and sell shares during trading hours.

Mortgage REITs

Mortgage REITs or mREITs invest in mortgages, financing real property. They provide the funds developers and builders need to buy or build income producing real estate. mREITs earn interest on the loans, which they payout to shareholders as dividends.

PNLRs

PNLRs are publicly traded REITS that are non-listed. They are registered with the Securities and Exchange Commission, but they are not traded on public exchanges, such as the NYSE. Public non-traded REITs are less liquid because they are not listed and/or publicly traded.

Private REITs

Private real estate investment trusts are also not publicly traded. They are also not regulated by the Securities and Exchange Commission. They are the least liquid investment funds among REIT options.

REIT Performance and Historical Returns

Like any investment, REITs have their ups and downs but they’ve shown a particularly appealing long-term edge for many investors.

According to Nareit data aggregated by Investopedia, the FTSE Nareit All Equity REITs Index delivered a 25-year annual total return of 9.53%, while the S&P 500 managed just 7.52% over the same period. That’s a meaningful gap that speaks both to income generation and growth. From 1990 to 2020, REITs outperformed U.S. stocks in over 56% of rolling scenarios, with REIT outperformance becoming even more pronounced over longer holding periods. In Q1 2025, REITs gained 2.8% while the S&P 500 dropped 4.4%, demonstrating their defensive nature during volatile periods.

Also, some REIT types have really crushed broader indices over long horizons. Self-storage REITs have posted an average annual total return of 17.3% since 1994, significantly beating the S&P 500, which returned about 10.1% over the same period. Industrial REITs, driven by e-commerce and supply chain demand, delivered an average of 14.4% annual total return since 1994.

How to Buy and Sell REITs

There are a few ways to buy and sell REITs, but you should know that most REITs have a required investment timeline. You might pay early redemption fees if you need to redeem early, so always read the fine print before investing.

If you’re wondering how to invest in REITs, the easiest way is through publicly traded REITs, which you can purchase directly through a brokerage account—just like buying shares of stock. They’re liquid, relatively easy to trade, and don’t usually come with the same restrictions as private REITs.

For those interested in private equity REITs or mortgage REITs, you can buy shares through a broker affiliated with the REIT. These often require a longer investment horizon and may come with more restrictions, but they can also offer unique exposure that isn’t always available in the public markets.

Another option for beginners is to invest in REIT mutual funds or ETFs, which provide exposure to a basket of REITs rather than a single company. This can help spread out risk while still giving you access to steady dividends.

Finally, if income is your priority, you might consider high dividend REITs. These are especially appealing for investors looking for reliable cash flow, as they often pay above-average dividend yields compared to other stocks.

REIT Pros

• Low minimum investment requirements.
  You can invest in real estate with a small investment, sometimes as little as $10. This removes the barrier to entry that owning real estate usually has.
• Publicly traded REITs are liquid.
  You can trade publicly traded REITs whenever the market is open, which means you can liquidate your investment in a pinch should it be necessary.
• You might earn dividend income.
  While there isn't a guarantee they will, there is a good chance that a publicly traded REIT or private REIT will pay dividends.
• A great way to diversify your investment portfolio.
  Your investment advisor likely recommends diversifying your portfolio, and including real estate investments in your portfolio can be the perfect way to do it.

REIT Cons

• REITs have a long timeline.
  With the exception of publicly traded REITs, you might be tied up in the investment for the long term. Non traded REITs can tie up your funds for several years without an option for early redemption.
• Dividends can be taxable income.
  Talk to your investment advisor about the tax liabilities you might incur if you invest in a real estate investment trust that pays dividends.
• There's no guarantee of appreciation.
  Real estate has a history of long term capital appreciation, but there's no guarantee. The housing crisis of 2008 showed us that anything is possible, so you should always be prepared.

Related article: REIT vs Real Estate Fund: Key Differences Explained

REITs for Beginners: Essential Investment Tips

1. Start With Publicly Traded REITs
They’re easy to buy and sell through a brokerage account, and they give you exposure to income-producing real estate without the complexity of private deals.

2. Understand the Metrics
Learn to read REIT-specific metrics like FFO, AFFO, and Dividend Yield. These will help you gauge whether a REIT’s income and dividends are sustainable.

3. Diversify Across Sectors
Don’t put all your money into one type of REIT. For example, mix industrial, healthcare, and residential REITs to spread your risk.

4. Check Dividend History
Since many investors look to REITs for income, review a REIT’s dividend track record. Consistent payouts over time signal stability may sometimes indicate higher risk.

5. Be Aware of Fees and Liquidity
Public REITs are liquid, but private REITs often come with redemption restrictions and fees. Always read the fine print before investing.

6. Pay Attention to Interest Rates
REIT performance is often sensitive to interest rate changes. Rising rates can increase borrowing costs for REITs, while falling rates may boost their value.

7. Think Long-Term
REITs are best viewed as part of a long-term portfolio strategy. Over decades, they’ve provided solid total returns through both dividend income and capital appreciation. Patience pays off.

Avoiding Fraud in REIT Investments

Like any investment, there is always a risk of fraud when investing in REITs. To protect yourself, it’s crucial to verify the legitimacy of the investment before putting money in.

Even non-traded REITs are required to register with the U.S. Securities and Exchange Commission (SEC). If you’re considering private REITs, make sure you do thorough due diligence, not only on the REIT itself but also on the advisor or broker recommending it.

A good first step is to use the SEC’s EDGAR database, where you can check filings, registration details, and disclosures. Beyond that, don’t hesitate to do your own research into the real estate company behind the REIT, ensuring its track record and business model are legitimate.

Taking these precautions may not eliminate all risk, but they significantly reduce the chance of falling victim to fraudulent schemes.

Popular Best-Performing REITs

When building a diversified portfolio, many investors look for stability, income, and long-term growth. That’s why the search for the best REITs to invest in has become so popular. Below are five strong examples currently standing out in the market.

• Prologis, Inc. (PLD) – It’s one of the global leaders in industrial real estate—warehouses and logistics hubs. With rising demand for e-commerce and supply chain infrastructure, Prologis has strong fundamentals and analysts see solid upside.
• American Tower Corp. (AMT) – As 5G and data usage grow (plus remote work / streaming), demand for wireless towers remains strong. American Tower is well-positioned with a large global footprint.
• Realty Income Corporation (O) – It’s often called “The Monthly Dividend Company” because it has a long record of monthly payments and a diversified portfolio of tenants.
• Welltower, Inc. (WELL) – Rising demand for senior housing and healthcare facilities; Welltower’s recent increases in FFO forecasts suggest resilience and growth in this space.
• VICI Properties (VICI) – Good yield, strong dividend growth over recent years, and exposure to fun and entertainment properties (which have been bouncing back as people spend more on experiences).

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How Does a Company Qualify as a REIT?

For a company to qualify as a REIT, it must go through a rigorous process to prove the following:

• The company invests at least 75% of its assets in real estate
• The company pays out at least 90% of its profits to its shareholders
• Be a taxable corporation
• Have at least 100 shareholders
• Five or less shareholders cannot own more than 50% of the shares
• At least 75% of the gross income must come from rental income, interest on mortgages, or capital appreciation

Key Takeaways

Real Estate Investment Trusts (REITs) can be a great way to get your foot in the door with real estate investing. Even if you think you don't have enough money to own real estate, REIT investments can be the way to diversify your portfolio. In addition, you'll enjoy long term capital appreciation, dividends, and the pride that comes with knowing that you own a piece of commercial real estate. Take a look at our website to get started investing today!

REIT FAQs

What Is a Paper Clip REIT?

A paper clip REIT is a combination of two entities, one that owns the real estate properties and the other that runs them. It's not a common form of a REIT because the SEC regulations are so strict because of the risk of a conflict of interest. Still, it does afford companies more flexibility for operations that aren't typical of a REIT.

Can You Lose Money on a REIT?

Should you invest in REITs? Like any investment, there is always the risk of losing money on a REIT. While real estate has a decent performance history, there's no guarantee that it will continue. Therefore, it's best to diversify your investment portfolio to reduce the risk of a total loss.

Are REITs Safe During a Recession?

REITs have generally protected investors during a recession because they usually have the same reaction to the market as the stock market. While real estate isn't 100% recession-proof, it could provide more protection in a diversified portfolio.

How Much of Your Portfolio Should Be In REITs?

How much of your portfolio should be in REITs depends on your situation. Talk with your financial advisor to determine the right allocation based on your financial goals and risk tolerance.

REIT vs. C-Corp: What is the Difference?

The main difference between a REIT and a C-Corp lies in how they’re structured and taxed. A REIT is required to distribute at least 90% of its taxable income to shareholders as dividends, which means it generally avoids paying corporate income tax but passes the tax responsibility to investors. A C-Corp, on the other hand, pays corporate taxes on its profits, and then shareholders are taxed again on dividends they receive, often referred to as “double taxation.” While C-Corps offer more flexibility in retaining earnings for growth, REITs are designed to maximize income distribution, making them especially attractive to income-focused investors.