REITs (Real Estate Investment Trusts)
Owning real estate sounds like a dream investment—until you realize the reality:
- Massive down payments
- Dealing with tenants (hello, 2 AM plumbing disasters)
- Endless maintenance, taxes, and paperwork
What if you could own real estate, collect passive income, and build wealth—without ever fixing a broken water heater or chasing down late rent payments?
Photo by Dillon Kydd on Unsplash
That’s exactly what Real Estate Investment Trusts (REITs) offer.
A REIT is like a real estate company that does all the work for you. You buy shares in the REIT, and they handle the properties, the tenants, and the rent collection. In return, they’re legally required to pay out at least 90% of their profits to investors—meaning you get a steady stream of passive income.
But does a REIT really stack up against owning physical properties? And how do you actually make money from them? Let’s break REIT investing down.
What is a REIT (Real Estate Investment Trust)?
Picture a massive real estate empire—think shopping malls, apartment complexes, office towers, even hospitals. Now imagine you could own a small piece of that empire without needing millions of dollars.
That’s what a REIT (Real Estate Investment Trust) is—a company that owns and operates income-generating properties while investors (you) get paid dividends from the profits.
The best part? A REIT is legally required to pay out at least 90% of their income to shareholders. So instead of a traditional stock that might reinvest profits, REITs pass the cash flow directly to you.
For example: Instead of buying a rental property for $300,000, you could invest $1,000 in a REIT that owns hundreds of properties and still collect rental income—all without the headaches of being a landlord.
REIT vs. Traditional Real Estate: Which is the Better Investment?
Owning physical real estate sounds glamorous—until you’re chasing tenants for rent or shelling out thousands for a new roof. REITs eliminate the hassles while still giving you exposure to real estate. But how do they actually compare?
| Factor | REITs | Traditional Real Estate |
|---|---|---|
| Ownership | Shares in a real estate company | Physical property you own |
| Income | Dividends (paid from rental income) | Rental income after expenses |
| Upfront Costs | Low—buy shares like stocks | High—down payment, maintenance, taxes |
| Liquidity | High—can sell shares anytime | Low—selling a property takes time |
| Diversification | High—exposure to multiple properties | Low—typically own only a few properties |
| Management Responsibilities | None—completely passive | High—dealing with tenants, repairs, etc. |
Think of it like this:
- If you want steady income with no stress, a REIT is the winner.
- If you want full control and bigger potential profits (but with more headaches), physical real estate wins.
The Different Types of REITs (And How They Make Money)
Not all REITs are the same. Some own apartment buildings, others shopping malls, while some don’t even own property—they just finance real estate deals.
Let’s break down what you need to know…
Equity REITs (Own & Operate Properties)
Think of these as massive landlords. They own properties—apartments, malls, office buildings, hotels—and collect rent from tenants.
- Best for steady dividend income
- Profits come from rents, not loans
Example: If you invest in an apartment REIT, you’re essentially collecting rent from hundreds of tenants.
Mortgage REITs (mREITs - Finance Real Estate Deals)
This REIT doesn’t own properties—it acts like a real estate bank. Instead of collecting rent, they loan money to developers and landlords and profit from interest payments.
- Higher dividend yields, but riskier
- More sensitive to interest rate changes
Example: A mortgage REIT might lend money for a new shopping center, earning a percentage of the loan payments.
Hybrid REIT (A Mix of Both)
Why choose one when you can have both? A hybrid REIT invests in both properties and mortgage loans, offering a balance of rental income and interest earnings.
- More diversified but less specialized
Example: If a REIT owns apartment buildings AND provides loans to commercial landlords, it’s a hybrid REIT.
So which one is best for you? If you want stability, go with an Equity REIT. If you want high-risk, high-reward, a mortgage REIT may be better.
How Do You Actually Make Money with a REIT?
Most people invest in a REIT for one simple reason: dividends.
Here’s how a REIT can generate steady passive income:
Rental Income – The REIT collects rent and distributes profits to investors.
Stock Price Growth – Just like stocks, REIT shares can appreciate over time.
Special Tax Benefits – REIT dividends are taxed differently, which can mean higher after-tax returns.
Some REITs focus on high dividend yields (meaning you get paid more upfront), while others prioritize long-term growth.
Example: A REIT paying a 6% dividend yield means that if you invest $10,000, you’ll earn $600 per year in passive income—without ever dealing with a tenant.
For an official breakdown of how an REIT functions and how they’re regulated, check out the SEC’s REIT guide.
How to Invest in REITs (Step-by-Step Guide)
Investing in them is easier than buying rental properties. You just need a brokerage account and a few clicks.
Step 1: Open a Brokerage Account
To buy a REIT, you need an account with a brokerage like Fidelity, Charles Schwab, or Robinhood. Some brokers also offer REIT ETFs that bundle multiple REITs together.
Step 2: Choose a REIT That Fits Your Strategy
Want consistent cash flow? Look for a high dividend REIT (like apartment and retail REITs). If you want long-term growth? Consider data centers, an industrial REIT, or a logistics REIT.
Step 3: Invest & Start Collecting Dividends
Once you buy shares, you start earning passive income—without worrying about tenants, maintenance, or property taxes.
Final Thoughts: Are REITs Right for You?
If you love the idea of real estate investing but hate the headaches of being a landlord, REITs are a perfect option.
- Want hands-off real estate investing? REITs win.
- Want full control over properties? Traditional real estate is better.
Either way, real estate is one of the best long-term investments, and REITs let you tap into its wealth-building power without the usual barriers.