REIT Investing Guide

What Is a REIT?

A REIT is a company that owns, operates, or finances income-producing real estate. REITs trade on stock exchanges like regular stocks, but they're required to distribute at least 90% of taxable income as dividends.

This structure means REITs typically offer higher yields than regular stocks—often 3-6%+.

Types of REITs

Equity REITs (Most Common)

Own and operate real estate properties. Income comes from rent collection.

• Residential: Apartments (AVB, EQR)
• Office: Commercial buildings (BXP)
• Retail: Shopping centers, malls (SPG, O)
• Industrial: Warehouses, logistics (PLD)
• Healthcare: Hospitals, senior housing (WELL, VTR)
• Data Centers: Server facilities (EQIX, DLR)
• Cell Towers: Wireless infrastructure (AMT, CCI)

Mortgage REITs (mREITs)

Don't own property—they own mortgages or mortgage-backed securities. Higher yields but more volatile and interest-rate sensitive.

Popular REIT ETFs

REIT Tax Considerations

Important: REIT dividends are mostly taxed as ordinary income, not qualified dividends. This makes them less tax-efficient in taxable accounts.

Best Account Placement

• IRAs/401(k)s: Ideal—no tax on dividends until withdrawal
• Taxable accounts: Less efficient due to ordinary income treatment

Section 199A Deduction

The 2017 tax law allows a 20% deduction on qualified REIT dividends for most taxpayers, reducing the effective tax rate. This helps offset the ordinary income treatment.

REIT Metrics

Funds From Operations (FFO)

Net income + depreciation - gains on sales. Better measure than earnings for REITs because real estate depreciation is an accounting construct—properties often appreciate.

Adjusted FFO (AFFO)

FFO minus capital expenditures needed to maintain properties. Best measure of sustainable dividend capacity.

Occupancy Rate

Percentage of rentable space that's leased. Higher is better. Watch for declining trends.

Pros and Cons

Pros

• Real estate exposure without buying property
• High dividend yields
• Liquidity (buy/sell instantly)
• Professional management
• Diversification across many properties

Cons

• Tax inefficiency in taxable accounts
• Interest rate sensitivity (rising rates hurt REITs)
• Sector-specific risks (office REITs struggling post-COVID)
• Correlation with stocks (not pure real estate exposure)

The Bottom Line

REITs offer an easy way to add real estate to your portfolio with high income potential. They're best held in tax-advantaged accounts due to dividend taxation.

For most investors, a broad REIT ETF like VNQ or SCHH provides diversified exposure. Individual REITs can offer higher yields but require more research.