Glossary
Real estate investment trust (REIT)
A company that owns or finances income-producing real estate and must pay out at least 90% of its taxable income as dividends.
On this page
A real estate investment trust (REIT) is a company that owns, operates or finances income-producing real estate, from apartments and warehouses to cell towers and data centers. Congress created the structure in 1960 so ordinary investors could own a share of large property portfolios the way they own stocks. In exchange for meeting tax rules, a REIT generally pays no corporate income tax on the earnings it distributes, which is why REITs are known for high dividends.
How it works
To qualify under the US tax code, a REIT must, among other tests, distribute at least 90% of its taxable income to shareholders each year, keep most of its assets in real estate and earn most of its income from rents, mortgage interest or property sales. There are two main kinds:
- Equity REITs own buildings and collect rent. They are the large majority.
- Mortgage REITs lend money or buy mortgage securities and earn the interest spread, which makes them far more sensitive to interest rates.
Publicly traded REITs list on exchanges and trade like any stock. Non-traded REITs are sold through brokers but cannot be sold easily, and they often carry high fees.
What to watch for
- Taxes. Most REIT dividends are taxed as ordinary income rather than at lower qualified-dividend rates, which is one reason many investors hold them in tax-advantaged accounts.
- Interest rates. REITs borrow heavily and their yields compete with bonds, so rising rates tend to pressure prices.
- Property type. Office, retail, industrial and residential REITs can move very differently. In the GICS system, most REITs sit in the Real Estate sector.
Related terms
Sources and further reading
- 26 U.S.C. §§ 856–857 — REIT qualification and distribution rules