A beginner-friendly explanation of REITs: what they are, how they work, and whether they should be part of your portfolio.
- REITs allow ordinary investors to invest in large-scale real estate, from shopping centres and office buildings to apartment complexes and data centres, without buying property directly.
- The REIT Structure To qualify as a REIT, a company must meet specific IRS requirements: invest at least 75% of assets in real estate, derive at least 75% of income from real estate sources, and distribute at least 90% of taxable income to shareholders annually.
- Mortgage REITs invest in real estate debt rather than physical properties, earning income from the interest spread on mortgage-backed securities.
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. REITs allow ordinary investors to invest in large-scale real estate, from shopping centres and office buildings to apartment complexes and data centres, without buying property directly. They trade on stock exchanges like regular stocks, making them accessible to anyone with a brokerage account.
The REIT Structure
To qualify as a REIT, a company must meet specific IRS requirements: invest at least 75% of assets in real estate, derive at least 75% of income from real estate sources, and distribute at least 90% of taxable income to shareholders annually. This distribution requirement is what makes REITs attractive to income investors. The mandatory high payout means REIT yields consistently exceed those of the broader stock market.
How REITs Make Money
Equity REITs, the most common type, own and operate properties. They collect rent from tenants, manage the properties, and distribute the net income to shareholders. Revenue grows when rents increase, when occupancy rises, or when new properties are acquired. Mortgage REITs invest in real estate debt rather than physical properties, earning income from the interest spread on mortgage-backed securities. Equity REITs are generally more appropriate for most investors due to their simpler risk profile and more tangible underlying assets.
Why Consider REITs
REITs provide several benefits in a diversified portfolio. Higher income, as REIT yields typically range from 3% to 5%, well above the S&P 500 average. Real estate diversification, since REIT returns are not perfectly correlated with stock or bond returns. Inflation protection, as property values and rents tend to rise with inflation over time. Professional management, eliminating the need for personal property management expertise. And liquidity, since publicly traded REITs can be bought and sold instantly during market hours.
Should You Invest
REITs make sense for most investors as a portfolio diversifier and income enhancer. A 5% to 15% allocation to REITs within a broader portfolio is a common recommendation. This can be achieved through a single REIT index ETF that provides exposure to hundreds of REITs across all property sectors. For most investors, a broad REIT ETF is preferable to individual REITs because it provides instant diversification across property types and geographic regions.
Note that most total stock market index funds already include a small REIT allocation, so a dedicated REIT holding adds to that existing exposure rather than introducing a completely new asset class.
REIT values fluctuate with real estate markets and interest rates. Dividends are not guaranteed. See our financial disclaimer for important disclosures.
A worked example
Imagine investing $500/month for 30 years at an average 8% annual return. Total contributions: $180,000. Final balance: roughly $745,000. The first $180,000 is yours; the other $565,000 is compounded growth. Now imagine starting 10 years later - same $500/month for 20 years at 8%: contributions $120,000, balance $295,000. The 10 years cost you about $450,000 in foregone growth. Time in the market beats timing the market by an enormous margin.
Common mistakes to avoid
- Trying to time the market. Studies consistently show that missing just the 10 best market days over 20 years cuts returns roughly in half. You can't reliably know which days those will be.
- Picking individual stocks based on news or tips. By the time it's news, the price already reflects it. Index funds aren't exciting but they outperform most retail stock-picking by a wide margin.
- Panic-selling in a downturn. Selling locks in losses. Markets have always recovered. The investors who do worst are the ones who sell low and re-buy high.
Frequently asked questions
How much money do I need to start investing?
Less than you think. Most major brokerages (Fidelity, Schwab, Vanguard) have no minimum balance. Fractional shares mean you can buy a $1 slice of any stock or ETF. Realistically, $50-100/month into a low-cost index fund is enough to start building real wealth over decades.
Is it too late to start investing at 40, 50, or 60?
No - but the strategy changes. At 40 you still have 25 years of compounding ahead. At 50 the focus shifts to maximizing 401(k) contributions (you can contribute extra after age 50). At 60 it's about preserving what you have and shifting to a more conservative allocation. The worst day to start was 20 years ago; the second-best is today.
Should I invest in individual stocks or index funds?
Index funds for nearly everyone. Over 20-year periods, 80%+ of professional fund managers fail to beat the index - and they have PhD analysts and millions in research budgets. A target-date retirement fund or a total-market index ETF will outperform what almost any retail investor can do picking individual stocks.
What is the safest investment?
FDIC-insured savings accounts and CDs (up to $250,000 per bank per ownership type) and US Treasury bills/bonds are the safest. They won't make you rich but they won't lose principal. For real (inflation-adjusted) safety, TIPS and I-Bonds protect against inflation, which traditional bonds don't.
How much should I have in stocks vs bonds?
A starting heuristic is 'your age in bonds' - so a 30-year-old holds 70% stocks / 30% bonds. Many financial planners now suggest something more aggressive given longer lifespans: 110 or 120 minus your age in stocks. Target-date funds do this automatically based on your retirement year.
Where this guide fits in
This article is part of the Chase The Dollar editorial library of practical money guides. We update guides as rules and rates change. If you spot a mistake or want us to cover a topic, the contact form is the fastest way to reach us.