What is a REIT? A REIT (Real Estate Investment Trust) is a company that owns, operates, or finances income-producing real estate — apartment buildings, offices, warehouses, data centers, and more — and trades on a stock exchange just like an ordinary stock. Buying shares of a REIT gives you exposure to real estate income and price appreciation without needing to buy, finance, or manage physical property yourself.
Instead of saving for a down payment and managing a rental property directly, an investor buys shares of a REIT that owns a portfolio of apartment buildings across many cities. The REIT collects rent, pays operating and financing costs, and distributes most of what's left to shareholders as dividends — all without the investor ever touching a lease or a leaky faucet.
The 90% payout rule
REITs are legally required to distribute at least 90% of their taxable income to shareholders as dividends in order to qualify for REIT tax status, which lets the REIT itself avoid paying corporate income tax on that distributed income. This isn't optional or a matter of management preference — it's a structural requirement, and it's the core reason REITs, as a category, tend to carry meaningfully higher dividend yields than the average stock.
Equity REITs vs. mortgage REITs
An equity REIT owns physical properties directly and earns income mainly from collecting rent — this is what most people picture when they think of a REIT. A mortgage REIT (mREIT) works differently: instead of owning buildings, it earns income from interest on real estate loans and mortgage-backed securities. That makes an mREIT behave more like a financial company than a landlord, and generally more sensitive to interest rate movements than an equity REIT.
How REIT dividends are taxed
Because REITs typically avoid paying corporate income tax on the income they distribute, a significant portion of REIT dividends is often taxed as ordinary income to the shareholder, rather than at the lower rate that applies to many "qualified" stock dividends. The exact tax treatment can vary by the type of distribution a REIT makes in a given year, so this is an area worth checking current rules on, or discussing with a tax professional, rather than assuming REIT dividends are taxed the same way as a typical stock's.
Interest rate sensitivity
REITs have historically tended to be more sensitive to interest rate changes than the average stock, for two connected reasons: higher rates raise the cost of the debt many REITs use to finance property purchases and development, and higher rates on safer income alternatives can make a REIT's dividend yield comparatively less attractive by contrast. That relationship isn't fixed or mechanical — property type, location, and the underlying real estate market's strength all matter too — but it's a pattern worth understanding before treating REIT yield as directly comparable to a bond yield.
Common mistakes
1. Chasing REIT yield without checking the payout sustainability
A REIT's high yield is structural, not automatically a sign of financial strength — the same payout-ratio scrutiny that applies to any dividend stock still applies here.
2. Treating all REITs as one uniform asset class
Equity REITs and mortgage REITs behave differently, and even among equity REITs, property type (residential, industrial, data center, retail) meaningfully changes the risk and growth profile.
3. Ignoring interest rate sensitivity when sizing a position
REITs can add real diversification to a portfolio, but their rate sensitivity means they don't always move independently of broader fixed-income markets the way some investors assume.