You’ve probably heard that real estate is a great way to build wealth — but buying a house or an apartment building takes a pile of cash most 20-somethings don’t have. A REIT lets you invest in real estate without buying a whole property.
What a REIT Actually Is
A REIT — short for real estate investment trust — is a company that owns income-producing real estate: apartment buildings, office towers, shopping malls, warehouses, hotels, even cell towers and data centers. You buy shares in the REIT the same way you buy shares of a regular stock, and the company uses investors’ money to buy and manage properties.
You earn money from a REIT in two ways. First, the properties collect rent, and the REIT passes most of that rent on to you as dividends. Second, if the properties rise in value, the REIT’s share price can rise too. Instead of saving up hundreds of thousands of dollars to buy one rental house, you can buy $50 or $100 of shares in a company that owns hundreds of properties.
How REITs Make Money (and Pay You)
A REIT’s business is simple: own property, collect rent, pay the bills, and send the leftover cash to shareholders. By law, a REIT must pay out at least 90% of its taxable income as dividends. That rule is why REITs often pay higher dividends than regular stocks — they are not allowed to hoard the profits.
That steady dividend stream is the main reason beginners notice REITs. If you want a refresher, our guide to What Is a Dividend? (Explained Simply) explains dividends from scratch. But a high dividend is not free money: the share price can fall, the dividend can be cut if tenants stop paying rent, and REIT dividends are usually taxed as ordinary income rather than at the lower qualified-dividend rate. Check the current year’s tax rules before you decide where to hold them.
| Buying a Rental Property | Buying a REIT | Buying a REIT ETF | |
|---|---|---|---|
| Money needed to start | Tens of thousands or more | As little as one share | As little as one share |
| Work involved | You are the landlord | None — the REIT manages everything | None |
| How many properties you own a piece of | One | Dozens or hundreds | Hundreds across many REITs |
The Two Main Types of REITs
Equity REITs own and manage actual properties. They make money from rent and from properties rising in value. This is the type most people mean when they say “REIT,” and it is the type most beginners should start with.
Mortgage REITs — often called mREITs — do not own buildings. They lend money to real estate owners or buy mortgages, and profit from the difference between the interest they earn and the interest they pay to borrow. They can pay very high dividends, but they are much riskier and far more sensitive to interest rate changes. Most beginners should skip mREITs entirely.
There is also a simpler route: instead of picking one REIT, you can buy a REIT ETF, which holds shares in dozens of REITs at once. If you are new to ETFs, our guide to What Is an ETF? (Explained Simply) explains how they work.
How to Buy a REIT
- Open a brokerage account. If you don’t have one yet, our guide to What Is a Brokerage Account? (Explained Simply) walks through what it is and how to open one.
- Decide between one REIT or a REIT ETF. A single REIT is a bet on one company and its properties. A REIT ETF spreads that bet across many companies.
- Look at the dividend yield and the fee. A yield far above the rest of the market can be a warning sign, not a bargain. For an ETF, check the expense ratio — a low fee keeps more of the return in your pocket.
- Buy a small amount and reinvest the dividends. Reinvesting dividends buys more shares automatically, which is how the compounding effect builds over time.
The Risks Nobody Mentions
- Interest rates hurt REITs. When rates rise, borrowing gets more expensive for REITs and income investors can get better yields elsewhere, which can push REIT prices down.
- Property markets go down too. A recession, empty offices, or a struggling mall can mean less rent coming in and lower property values.
- Dividends are not guaranteed. If tenants stop paying or properties sit empty, the REIT can cut its dividend — and the share price usually falls with it.
- They are not a complete portfolio. A REIT is one slice of the real estate market, not a diversified portfolio on its own. It works best as a small piece alongside broad index funds.
Frequently Asked Questions
How much money do I need to invest in a REIT?
As little as the price of one share — often under $100 — and many brokerages let you buy fractional shares for even less.
Do REITs pay monthly dividends?
Some do, but most pay quarterly — and the amount can change if rent collections drop.
Are REITs better than buying a rental property?
For most beginners, yes — they are cheaper to start, require no landlord work, and you can sell in a day. But you give up control: you cannot pick the properties or raise the rent yourself.
Should REITs be in a Roth IRA?
Many people hold REITs in a Roth IRA or another tax-advantaged account because REIT dividends are usually taxed as ordinary income. Check the current year’s tax rules before deciding where to hold yours.
Bottom Line
A REIT is a company that owns income-producing real estate and passes most of the rent on to you as dividends. You can buy shares for as little as the price of one share, which makes real estate investing possible without a down payment or a mortgage.
It is a useful tool, not a magic one. REITs can pay attractive dividends and add variety to a portfolio, but they fall when interest rates rise, their dividends can be cut, and they are no substitute for a broad, diversified plan. Start small, and treat a REIT as one slice of your portfolio — not the whole thing.
Join free — one short email when a new guide drops. Unsubscribe anytime.
This article is for education only and is not financial advice.