REIT (Real Estate Investment Trust)
Definition
A company that owns, operates, or finances income-producing real estate and distributes at least 90% of taxable income as dividends, offering investors liquid real estate exposure.
REITs (Real Estate Investment Trusts) allow ordinary investors to own real estate without buying physical properties. A REIT owns a portfolio of properties — apartments, offices, malls, warehouses, data centers, cell towers, hospitals — and distributes the rental income as dividends.
By law, REITs must distribute at least 90% of their taxable income as dividends, making them popular income investments. REIT dividend yields typically range from 3-7%, significantly higher than the S&P 500's roughly 1.5% yield. This high payout is possible because real estate generates steady rental income.
REITs trade on stock exchanges like regular stocks, providing liquidity that direct real estate investment lacks. You can buy or sell REIT shares instantly, unlike a physical property that might take months to sell. REIT ETFs (like VNQ) offer diversified real estate exposure in a single trade.
There are several types: equity REITs (own and manage properties), mortgage REITs (finance real estate by purchasing mortgages), and hybrid REITs. Within equity REITs, sectors include residential, office, retail, industrial, healthcare, data centers, and specialty (cell towers, timber, prisons).
The tax treatment of REIT dividends is a key consideration. Most REIT dividends are classified as ordinary income (not qualified dividends), meaning they're taxed at your regular income rate rather than the lower qualified dividend rate. This makes REITs best held in tax-advantaged accounts like IRAs.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
Are REITs a good investment?
REITs provide portfolio diversification, income, and inflation protection since rents tend to rise with inflation. Historically, REITs have delivered competitive total returns. However, they're interest-rate sensitive — rising rates can hurt REIT prices. A 5-10% portfolio allocation is common.
Should I hold REITs in a tax-advantaged account?
Yes, ideally. REIT dividends are mostly taxed as ordinary income, making them tax-inefficient in taxable accounts. Holding REITs in an IRA or 401(k) shields these dividends from annual taxation, improving your after-tax return.