REITREIT
A REIT is a company that owns or finances income-producing property and trades like a stock. US REITs must distribute at least 90% of their taxable income to shareholders, so they are often held for income. They are usually valued with funds from operations (FFO) rather than earnings.
A REIT lets investors own a slice of large property portfolios through a share. REITs pay out most of their income as dividends in exchange for special tax treatment. Tax rules and REIT regimes differ by country, so check local rules.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 3 min
- Also called
- Real estate investment trust, Property trust, Listed property company
- Updated
REITs in plain words
A REIT is a company built to hold — and usually manage — rent-earning real estate or related assets.1
REITs let ordinary investors share in the income from commercial property without buying buildings themselves.1
In the US, a REIT must pay out dividends equal to at least 90% of its taxable income, with certain adjustments.2
How to evaluate a REIT
Choose listed or non-traded
Buy shares in a listed REIT through a broker, like any other stock.1
Understand liquidity
Non-traded REITs are illiquid investments.1
Value on FFO
Judge performance with FFO, a measure US regulators accept.3
Check the payout
US REITs distribute based on 90% of the REIT’s taxable income.2
Plan for tax
Remember that you pay tax on the dividends and any capital gains.1 Rules differ by country.
Review leverage and rates
Rising rates raise funding costs and compete with REIT yields.
Worked examples
Example 1 — Yield
5% yieldA hypothetical REIT trades at $40 and pays $2.00 a year.
| Price | $40 |
| Dividend | $2.00 |
| Yield | 5% |
The payout comes from the property's income, shared out among investors.1
Example 2 — P/FFO
15× FFOA hypothetical REIT has FFO of $3 per share and trades at $45.
| FFO/share | $3 |
| P/FFO | 15× |
Analysts use FFO because it is an accepted performance measure for REITs.3
Example 3 — Non-traded exit
Hard to exitA hypothetical investor needs cash from a non-traded REIT.
| Exchange listing | None |
Selling may be hard, because non-traded REITs are illiquid investments.1
Listed REIT vs direct property
| Aspect | Listed REIT | Direct property |
|---|---|---|
| Minimum investment | One share | Whole property |
| Liquidity | Daily trading | Months to sell |
| Management | Professional | Owner |
| Price volatility | Moves with stock market | Appraised, smoother |
Why investors hold REITs
Income
High Dividend Yield from rents.
Diversification
Add property for Diversification.
Inflation link
Rents may rise with Inflation over time.
Allocation
A property sleeve in Portfolio Allocation.
Advantages and disadvantages
Advantages
- Easy access to large property portfolios.
- High income payouts.
- Listed REITs trade daily.
- Professional management.
Disadvantages
- Sensitive to interest rates.
- Dividends often taxed as ordinary income in the US.
- Non-traded REITs are illiquid.
- Little retained cash for growth.
Going deeper
Read as far as you need. Each level builds on the one before it.
What you own
Beginner
At heart, a REIT is a property owner and operator that passes most of its income to shareholders.1
The payout rule
Intermediate
The US payout test is based on 90% of taxable income, with adjustments for the dividends-paid deduction and net capital gains.2 Other countries run their own REIT regimes with different rules.
Common mistakes
Valuing on P/E
Use P/FFO instead.
Ignoring rate risk
REIT prices often fall when rates rise.
Buying non-traded REITs for liquidity
They are hard to sell.
Forgetting tax treatment
REIT dividends may be taxed differently; rules differ by country.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A REIT owns income-producing real estate.
- It pays out most income as dividends.
- Listed REITs trade like stocks.
- Value REITs on FFO.
- Tax rules differ by country.
Frequently asked questions
Do REITs pay tax?
Are REITs safe?
How do I buy a REIT?
Further learning
- Volatility
Why listed REIT prices swing.
- Dividend Yield
Comparing REIT income.
- Interest Rate
Why rates move REIT prices.
- Liquidity
Listed vs non-traded REITs.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Real Estate Investment Trusts (REITs) (opens in a new tab) Checked .
- Internal Revenue Service (IRS). Instructions for Form 1120-REIT (opens in a new tab) Checked .
- Nareit. Funds From Operation (FFO) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.