Real estate investment trust (REIT)

A company that owns or finances income-producing real estate and passes most of its taxable income to shareholders as dividends.

What it means

A REIT lets investors own a share of properties such as apartments, offices, warehouses or cell towers without buying buildings themselves. To qualify for its special tax status, a REIT must pay out at least 90% of its taxable income to shareholders each year. Investors earn money from those dividends and from changes in the share price, which can fall with property values, rising interest rates, high vacancies or tenant problems.

Publicly traded REITs trade like stocks and are easy to sell; non-traded REITs can be hard to exit and may carry high fees. Because the REIT itself generally avoids corporate income tax, most of its dividends do not qualify for lower qualified dividend rates and are taxed largely as ordinary income, which is why many investors hold them in tax-advantaged accounts.

Example

Suppose someone invests $10,000 in a REIT paying dividends equal to 4% of its share price. That works out to $400 a year in income, mostly taxed at ordinary rates in a taxable account.

How it’s used

Adding real estate exposure without being a landlord
Seeking regular dividend income
Diversifying a stock and bond portfolio

Strengths and weaknesses

Strengths

Real estate exposure with small amounts of money
Relatively high dividend payouts
Publicly traded REITs are liquid and diversified across properties

Weaknesses

Sensitive to interest rates and property markets
Dividends are mostly taxed as ordinary income
Non-traded REITs can be illiquid and expensive

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.