Real Estate Investment Trusts (REITs): Understanding the Basics and Benefits

A REIT allows individual investors to buy shares in a company that owns and manages income-producing real estate. This can include office buildings, apartment complexes, warehouses, and storage facilities.

Real Estate Investment Trusts (REITs) own, operate, or finance income-producing real estate like offices and retail buildings. They must adhere to certain requirements set by the IRS and, depending on the type of REIT, can offer investors similar liquidity to stocks while still investing in real estate.

In this article, you'll learn

• What REITs are
• How they work and how they make money
• The types of REITs
• How to start investing in REITs

What are Real Estate Investment Trusts?

A REIT is a company that makes money by investing in, owning, or operating real estate. Investors can buy shares in that company and receive dividends from its investments without having to own or manage property themselves.

REITs can invest in a range of property types, such as office buildings, apartment complexes, warehouses, and storage facilities. Depending on the type of REIT, they typically focus on long-term investments by holding or financing assets. That's different from many other real estate investing companies, whose goal might be more focused on buying, developing, and reselling properties over the short term.

Market Size and Scope

Collectively, REITs of all types hold more than $4 trillion in gross assets. REITs specifically own or had interests in about 580,000 properties around the country, including institutional-quality real estate like data centers, office buildings, and industrial facilities.

For investors, that scale matters. REITs can provide access to the same high-quality properties investors prioritize, but with significantly lower barriers to entry and, in the case of public REITs, increased liquidity.

How do REITs Work?

Because real estate investment trusts have a special tax status, they operate a bit differently than other investment vehicles. To qualify as a REIT, a company must:

• Pay out a minimum of 90% of its income in dividends,
• Have at least 100 shareholders, with no more than five shareholders owning more than 50% of shares,
• Keep at least 75% of its total assets in real estate or cash, and
• Derive at least 75% of its annual gross income from real estate sources.

What are the Different Types of REITs?

Real estate investment trusts (REITs) can be broken down according to multiple variables: business model, listing status, and property sector. Understanding these types is essential for anyone looking to invest in real estate through REITs.

REITs by Business Model (Equity, Mortgage, Hybrid)

REITs can be broken down according to how they make money. Equity REITs own and manage income-producing properties. Mortgage REITs (mREITs), on the other hand, finance mortgages or mortgage-backed securities rather than owning property outright. Finally, Hybrid REITs do a mix of both.

Understanding Equity vs. Mortgage REITs (and how Hybrid REITs fit in) is the first step to deciding which is right for your goals.

Equity REITs

Equity REITs are the most common type. They own and manage income-producing properties, such as office buildings, shopping malls, apartments, and hotels. Equity REITs primarily generate revenue through leasing space and collecting rent.

Mortgage REITs (mREITs)

Mortgage REITs, or mREITs, do not own properties directly. Instead, they provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities. Their income comes from the interest earned on these financial assets. Compared to equity REITs, mREITs can be more sensitive to interest rate changes.

Hybrid REITs

Hybrid REITs combine the strategies of both equity and mortgage REITs. They own properties and invest in mortgages. This mix allows them to benefit from rental income and interest payments. However, hybrid REITs are less common and can be more complex than their pure equity or mortgage counterparts.

REITs by Listing Status

REITs can also differ based on whether they’re registered with the Securities and Exchange Commission (SEC) and traded on major stock exchanges.

REITs by Listing Type at a Glance

Public REITs are both SEC-registered and exchange-listed, while Private REITs are neither. Public Non-Listed REITs fall in between.

Public REITs

Public REITs are both registered with the SEC and traded on major stock exchanges. These are generally the most easily accessible REITs to invest in, and they are subject to SEC reporting and listing standards. However, they can be more sensitive to market volatility.

Public Non-Listed REITs

Public Non-Listed REITs, also known as Public Non-Traded REITs, are also registered with the SEC but do not trade on major stock exchanges. They are less liquid than publicly traded REITs but also aren’t subject to market volatility. Investors can buy shares through brokers or financial advisors.

Private REITs

Private REITs are not registered with the SEC and do not trade on public exchanges. They are typically available only to institutional investors and accredited individuals. Private REITs can offer unique investment opportunities but come with higher risks due to less regulatory oversight and lower liquidity.

REITs by Property Sector

Individual REITs often focus on similar property types. REIT sectors range widely, from commercial to residential and even narrower specifications.

Equity REITs often specialize in specific property types. This allows them to work with the individual qualities of those properties, like lease lengths, tenant needs, and individual demand drivers. For investors, that provides an opportunity to choose the kinds of cash flow and risk they’re most comfortable with.

For example, an equity REIT might buy AI data centers to rent out because the demand for them has grown significantly in recent years. Or it might invest narrowly in retail buildings, where triple-net lease tenants are common and relieve some of the landlord’s financial burden.

Mortgage REITs can also specialize, but in slightly different ways. Because mREITs don’t own property, that specialization comes down to the collateral behind the loans it owns. That often means commercial vs. residential real estate. Commercial mREITs often specialize even further to focus on loans for multifamily, office, retail, or other property types.

How do REITs Make Money?

Understanding how REITs make money is crucial for evaluating their potential as an investment. Here's a detailed look at the business models of different types of REITs. To put it simply, Equity REIT dividends come from rent, mREITs earn interest spread, and Hybrid REITs earn both.

Equity REITs

Equity REITs make money primarily through leasing space in the properties they own. They might list offices for rent, lease retail spaces, or otherwise rent out space to tenants. Here’s how their business model works:

• Lease Agreements: Equity REITs enter into lease agreements with tenants, which can range from individuals to large corporations.
• Rent Collection:The REIT collects rent from these tenants on a regular basis.

Mortgage REITs

Mortgage REITs (mREITs) generate income differently from equity REITs. Instead of owning properties, mREITs provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities. Here’s how mREITs operate:

• Interest on Mortgages: mREITs earn income from the interest on the mortgages they hold. This can include residential or commercial mortgages.
• Spread Income:The income is often derived from the spread between the interest they earn on mortgage assets and the cost of funding these assets.

Hybrid REITs

Hybrid REITs combine the income strategies of both Equity REITs and mREITs. They earn revenue from rental income and interest on mortgages. This dual approach allows them to diversify their income streams, though they are less common than pure equity or mortgage REITs.

How Have REITs Performed Historically?

Despite some market sensitivity, REITs offered positive returns for investors in recent decades. According to the FTSE Nareit All Equity REIT index, U.S. Equity REITs delivered a 10-year annualized total return of just under 6% and a 25-year annualized return of about 9% as of 2025.

REITs do come with some sensitivity to market conditions, including interest rate changes. Despite that, they’ve proven to be resilient during economic downturns: Across the last six recessions from 1980 to 2020, REITs outperformed private real estate during the span of the recession and in the four quarters afterward.

How to Invest in REITs

Investing in REITs can be a way to gain exposure to real estate without directly buying property. Here's how you can get started with different types of REITs and the role of financial professionals in the process.

Publicly Traded REITs

Publicly traded REITs are listed on major stock exchanges and can be bought and sold like any other stock. Here's how to invest in them:

• Research:Look into the REIT's portfolio, management team, and financial health. Pay attention to their dividend history and debt levels.
• Buy Shares:Purchase shares through a brokerage account. This can be done online, through a financial advisor, or directly from the exchange.
• Monitor Investments:Keep an eye on market trends and the performance of your REIT investments. Publicly traded REITs offer liquidity, making it easy to buy or sell shares.

Public Non-Traded REITs

• Consult a Financial Advisor:These REITs are typically sold by brokers or financial advisors. They can help you understand the investment and assess whether it fits your financial goals.
• Invest Through Offerings:Purchase shares through a broker or financial advisor who participates in the non-traded REIT’s offering. Be aware of the fees and the less liquid nature of these investments.

Private REITs

• Accredidation:Ensure you meet the criteria to be an accredited investor. Typically, you should have a net worth of over $1 million or an annual income of over $200,000.
• Work with Financial Professionals:Private REITs are often accessed through private placements. A financial advisor or broker can help navigate these investments and ensure they align with your portfolio.
• Understand the Risks:Private REITs can be less transparent since they don’t have the same SEC filing requirements as Public and Public Non-Traded REITs. Due diligence is crucial to ensure the investment's legitimacy.

What are the Roles of Brokers, Investment Advisors, and Financial Plnners?

Financial professionals play a crucial role in REIT investments. Here’s how they can help:

• Brokers:Facilitate the buying and selling of REIT shares, especially for publicly traded REITs. They can provide access to investment platforms and execute trades on your behalf.
• Investment Advisors:Offer personalized advice on selecting REITs that fit your investment strategy. They can help diversify your portfolio and manage your investments.
• Financial Planners:Assist in creating a comprehensive financial plan that includes REIT investments. They consider your overall financial goals, risk tolerance, and long-term objectives.

What Financial Metrics Should You Consider?

Traditional earnings per share (EPS) can be misleading for REITs because of the way GAAP requires them to report depreciation. For a more well-rounded evaluation, investors should also consider other metrics, including

• Net Asset Value (NAV):An estimate of a REIT’s equity value based on the market value of its properties, minus debt
• Funds from Operations (FFO): A way to measure cash generation. FFO starts with GAAP net income and adds back real estate depreciation and amortization while removing gains or losses from property sales. FFO is useful as a cleaner proxy for recurring operating earnings
• Adjusted FFO (AFFO): The cash a REIT has left over to pay dividends after regular property maintenance and rental costs. AFFO is calculated by taking the FFO and subtracting recurring expenses like maintenance, leasing commissions, and tenant improvements, then adjusting for non-cash items like straight-line rent.

Tips for New Investors

• Start Small:Begin with a modest investment in publicly traded REITs to get a feel for the market.
• Diversify:Spread your investments across different types of REITs and property sectors to manage risk.
• Do Your Homework:Research each REIT thoroughly. Consider factors like property types, geographic locations, and financial performance.
• Seek Professional Advice:Consult with financial advisors to ensure your REIT investments align with your financial goals and risk tolerance.

What are the Benefits and Risks of REITs?

REITs can offer some of the financial flexibility of stocks, but trade-offs vary depending on whether they’re listed, non-listed, or private. Understanding the pros and cons of each type of REIT is an important step in deciding whether to invest

Public REITs trade off higher liquidity for market sensitivity, while Private REITs offer access and flexibility with far less liquidity and transparency. Public Non-Listed sits between them.

In addition to the pros and cons, be sure to consider the tax implications of your investment. REIT dividends are often taxed as ordinary income, and portions can be treated as qualified dividends or capital returns.