What Is a REIT? Real Estate Investment Trusts Explained

A REIT (real estate investment trust, pronounced “reet”) is a company that owns, operates, or finances income-producing real estate — office buildings, apartments, warehouses, data centers, shopping centers, cell towers — and is legally required to distribute most of its taxable income to shareholders as dividends in exchange for favorable tax treatment. REITs let ordinary investors buy a stake in commercial real estate the same way they’d buy a stock, without directly purchasing, managing, or financing a property themselves.

The structure that makes REITs work

The defining feature of a REIT is a tax tradeoff written into how it’s regulated: a company that qualifies as a REIT doesn’t pay corporate income tax on the earnings it distributes to shareholders, provided it distributes at least 90% of its taxable income as dividends each year. That’s a meaningful exception to the usual pattern where corporate profits are taxed once at the company level and again when paid out as dividends to shareholders.

In exchange for that tax advantage, REITs face structural requirements: the bulk of their assets and income must come from real estate, they must have a minimum number of shareholders, and no small group of investors can hold a concentrated majority stake. The requirement to pay out most income as dividends also means REITs typically retain little cash for reinvestment, so growth usually comes from issuing new shares or taking on debt rather than plowing retained earnings back into new properties — which is part of why REIT dividend yields tend to run higher than the broader market, and why REIT share prices are unusually sensitive to interest rates, since debt financing costs directly affect how much new growth a REIT can afford.

Types of REITs

• Equity REITs — own physical properties directly and earn revenue mainly from rent. This is the most common type and the one most people mean by default when they say “REIT.”
• Mortgage REITs (mREITs) — don’t own property directly; instead they originate or purchase mortgages and mortgage-backed securities, earning income from the interest spread between what they borrow at and what they earn on those loans. This makes them considerably more sensitive to interest-rate movements than equity REITs.
• Hybrid REITs — combine both approaches, holding some physical property and some mortgage debt.

Within equity REITs, specialization by property type is the norm rather than the exception: residential (apartments), retail (shopping centers and malls), industrial (warehouses and logistics), healthcare (hospitals and senior living facilities), and increasingly infrastructure-adjacent categories like data centers and cell towers, which behave more like specialized infrastructure plays than traditional real estate.

Public, non-traded, and private REITs

Most REITs that individual investors encounter are publicly traded REITs — listed on a stock exchange, bought and sold like any other stock, with the liquidity and price transparency that comes with that. Non-traded REITs are registered with regulators and file public financial reports but don’t trade on an exchange, which typically means far less liquidity and reliance on the REIT’s own periodic valuation rather than a continuously updated market price. Private REITs aren’t registered with public regulators at all and are generally limited to institutional or accredited investors, similar in spirit to the access restrictions around hedge funds.

REITs vs owning property directly vs a real estate ETF

	Direct property ownership	REIT (publicly traded)	Real estate ETF/mutual fund
Minimum investment	Large (down payment, closing costs)	Price of one share	Price of one share
Liquidity	Low — can take months to sell	High — trades daily on an exchange	High
Diversification	Concentrated in one property	Spread across a REIT’s portfolio	Spread across many REITs
Management burden	Direct — tenants, maintenance, financing	None — professionally managed	None
Income treatment	Rental income, taxed as earned	Dividends, largely taxed as ordinary income	Depends on underlying holdings

What drives REIT returns

REIT total return comes from two sources: dividend income (typically the larger share, given the payout requirement) and share price appreciation tied to the value of the underlying properties and the REIT’s ability to grow rents and occupancy. Because REITs are financed partly with debt and because real estate valuations are themselves sensitive to prevailing borrowing costs, REIT prices tend to move opposite interest rates more reliably than the broader stock market does — rising rates increase financing costs and make REIT dividend yields comparatively less attractive next to safer fixed-income alternatives like a bond, while falling rates tend to do the reverse.

Sector matters as much as the REIT structure itself. A REIT holding data centers or cell towers is really a bet on that specific infrastructure demand, while a REIT holding suburban shopping malls faces a very different set of pressures from e-commerce and changing retail patterns — “REIT” describes a tax and legal structure, not a single investment thesis.

The takeaway

A REIT is a company built around a specific tax bargain: distribute most of your taxable income as dividends, and skip corporate income tax on it. That structure gives ordinary investors stock-like access to commercial real estate — with a dividend-heavy return profile, meaningful interest-rate sensitivity, and returns that depend heavily on which property sector a given REIT actually specializes in, whether that’s apartments, warehouses, or data centers.