REITs: Real Estate Income Without Buying Property

A real estate investment trust (REIT) owns income-producing property — malls, apartments, data centers, warehouses, cell towers — and is required by law to distribute most of its income to shareholders. For the price of a few shares, you get real estate income, professional management and daily liquidity, none of which a direct rental offers. REIT yields in 2026 typically run 3-5%, a full two points above the broad stock market, and the structure that forces those payouts is the reason.

What a REIT is, and the types

• Equity REITs own buildings and collect rent — the vast majority of the market, spanning apartments, offices, retail, industrial, healthcare, data centers and more
• Mortgage REITs (mREITs) own mortgages and mortgage-backed securities, earning the spread between borrowing and lending — higher yield, higher rate sensitivity
• Hybrid REITs do some of both
• Public non-listed REITs exist too, but liquidity and fee disclosures make listed equity REITs the sensible default for most investors

The tax advantage is the engine: a REIT that distributes at least 90% of its taxable income to shareholders avoids paying corporate income tax on that income. The trade is that the distributions are mostly taxed to you as ordinary income — REIT dividends do not get the lower qualified-dividend rate, which matters for taxable accounts. REITs work best in retirement accounts, where the tax structure is neutral.

The 90% payout rule

Yield math: REIT vs direct rental

REIT yield works exactly like a stock's: annual distribution divided by price. Compare that against the gross and net yield of a directly owned rental, and the liquidity difference shows up as a spread — a direct rental's gross yield of 6-8% compensates you for managing the toilet, the vacancy and the tenant.

                REIT: share $50.00, annual distribution $2.00 → yield 4.0%
Direct rental: $300,000 property, $24,000 rent → gross yield 8.0%
Expenses 30% (tax, insurance, maintenance, vacancy) → net yield ~5.6%
Add mortgage leverage to the rental: cash-on-cash higher, risk higher
REIT gives 4% with no vacancy calls; rental gives ~5.6% net with a second job
              

Where REIT income really comes from

REIT distributions are backed by rent, and rents are sticky: leases run 1-10 years for commercial property and renew in waves, which makes REIT income steadier than corporate earnings through recessions. The dividend growth story also applies — many REITs have raised distributions for 10-25 consecutive years, and because the payout rule forces income out, REITs participate in the dividend growth compounding described in the dividend investing guide. The dividend discount model calculator works on REITs directly, using the distribution growth rate in place of dividend growth.

The risks deserve the same attention as the yield. REITs are interest-rate sensitive — higher rates raise borrowing costs and competing bond yields, which has historically dragged REIT prices down in rate-shock years like 2022. Commercial real estate stress, from office vacancy to retail decline, hits the sector unevenly: data centers and industrial REITs have outgrown the legacy office basket. And leverage amplifies both directions. Sector selection within REITs is a real decision, not a detail.

The REIT checklist