A REIT (Real Estate Investment Trust) is a company that owns, operates, or finances income-producing real estate. REITs must distribute at least 90% of taxable income as dividends, making them popular for income-seeking investors. You can buy publicly traded REITs like stocks.

Are REITs a good investment?

REITs provide diversification, regular income (4-6% dividend yields), and real estate exposure without owning property. Over the long term, REITs have returned about 10-12% annually. However, REIT dividends are usually taxed as ordinary income, so they're best held in tax-advantaged accounts.

Most REIT dividends are taxed as ordinary income (not the lower qualified dividend rate). This makes REITs best held in tax-advantaged accounts like IRAs or 401(k)s. A portion of REIT dividends may be classified as return of capital or qualified dividends, reducing the tax burden.

REIT Investing: Real Estate Investment Trusts Explained (2026)

REITs let you invest in real estate without buying, managing, or financing property. They trade like stocks but provide exposure to real estate assets and typically pay higher dividends.

How REITs Work

Feature	Details
What they own	Income-producing real estate (apartments, offices, malls, warehouses, etc.)
Income source	Rent from tenants, property appreciation
Dividend requirement	Must distribute ≥90% of taxable income
Average dividend yield	4-6% (vs. S&P 500 ~1.3%)
How to buy	Through any brokerage, like buying a stock or ETF
Minimum investment	Price of 1 share (or less with fractional shares)

Types of REITs

REIT Type	What They Own	Example	Typical Yield
Residential	Apartments, single-family rentals	AvalonBay, Invitation Homes	3-4%
Commercial/Office	Office buildings	Boston Properties, Vornado	5-7%
Retail	Shopping centers, malls	Simon Property, Realty Income	4-6%
Industrial	Warehouses, distribution centers	Prologis, Duke Realty	2-4%
Healthcare	Hospitals, senior living, medical offices	Welltower, Ventas	4-6%
Data center	Server facilities	Equinix, Digital Realty	2-3%
Cell tower	Wireless communication towers	American Tower, Crown Castle	3-4%
Mortgage	Mortgage-backed securities (no physical property)	Annaly Capital, AGNC	8-14%
Diversified	Multiple property types	Brookfield, W.P. Carey	4-6%

REIT Performance vs. Other Investments

Historical Average Annual Returns (30-Year)

Investment	Average Annual Return	Volatility
REITs (FTSE Nareit All Equity)	10.5%	Medium-High
S&P 500	10.2%	Medium
Bonds (US Aggregate)	4.8%	Low
Gold	5.5%	Medium
Cash (savings accounts)	2.0%	None
Physical real estate (residential)	4-5% (+ rental income)	Medium

REIT Dividend Yields vs. Other Income Investments

Investment	Typical Yield (2026)	Tax Treatment
REITs	4-6%	Mostly ordinary income
Dividend stocks (S&P 500)	1.2-1.5%	Qualified (15-20% tax)
High-yield bonds	5-7%	Ordinary income
Corporate bonds	4.5-5.5%	Ordinary income
Treasury bonds	4.0-4.5%	Federal tax only
CDs	4.0-5.0%	Ordinary income
High-yield savings	4.5-5.0%	Ordinary income

How to Invest in REITs

Method	Minimum	Diversification	Fees	Best For
REIT ETF (VNQ, SCHH)	Price of 1 share	High (150+ REITs)	0.06-0.12%	Most investors
REIT mutual fund	$1,000-$3,000	High	0.10-0.50%	Retirement accounts
Individual REIT stocks	Price of 1 share	Low (one company)	$0 trade commission	Experienced investors
Non-traded REITs	$1,000-$25,000	Varies	High (10-15%+)	Generally avoid
Private REITs	$25,000+	Low	High	Accredited investors only

Recommendation: Start with a broad REIT ETF like VNQ (Vanguard) or SCHH (Schwab) for diversified exposure at minimal cost.

Tax Considerations

Dividend Type	How It’s Taxed	% of REIT Distributions
Ordinary income	Your marginal tax rate (10-37%)	~60-80%
Qualified dividends	Lower rate (0-20%)	~0-10%
Return of capital	Not taxed now (reduces basis)	~10-30%
Capital gains	Long-term rate (0-20%)	~0-10%

Where to Hold REITs for Tax Efficiency

Account Type	Tax Efficiency for REITs
Roth IRA/401(k)	Best—dividends grow and are withdrawn tax-free
Traditional IRA/401(k)	Good—dividends tax-deferred until withdrawal
Taxable brokerage	Worst—ordinary income dividends taxed annually
HSA	Excellent—tax-free contributions, growth, and withdrawals for medical expenses

The Bottom Line

REITs provide real estate exposure, diversification, and above-average income (4-6% yields) without the hassle of owning property. For most investors, a broad REIT ETF held in a tax-advantaged account is the simplest and most tax-efficient approach. Keep REIT allocation to 5-15% of your overall portfolio for diversification without over-concentrating in one asset class.