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.