How to Invest in REITs: Real Estate Returns Without Owning Property

You don’t need to own a rental property to invest in real estate. Real Estate Investment Trusts — REITs — let everyday investors tap into commercial real estate, apartment complexes, data centers, and more, all through a simple brokerage account. If you’ve ever wondered how to invest in REITs, this guide covers everything you need to know: what they are, how they work, the best ways to buy them, and the tax rules you can’t afford to ignore.

What Is a REIT?

A Real Estate Investment Trust is a company that owns, operates, or finances income-producing real estate. Congress created REITs in 1960 to give ordinary investors access to large-scale real estate ventures — the same way mutual funds give access to stocks and bonds.

To qualify as a REIT, a company must:

• Invest at least 75% of its total assets in real estate
• Derive at least 75% of its gross income from rents, mortgage interest, or property sales
• Pay out at least 90% of its taxable income as dividends to shareholders
• Have at least 100 shareholders and be managed by a board of directors or trustees

That 90% payout requirement is why REITs are famous for their dividends. It also means REITs tend to carry higher yields than most stocks — sometimes 3% to 6% or more annually.

Types of REITs

Equity REITs

Equity REITs own and operate physical properties. They generate income primarily through rent collected from tenants. This is the most common and widely held type. Examples include Prologis (industrial/logistics), American Tower (cell towers), Simon Property Group (retail malls), and Realty Income (net lease commercial properties).

Mortgage REITs (mREITs)

Mortgage REITs don’t own properties — they invest in mortgages and mortgage-backed securities. They profit from the spread between short-term borrowing costs and the interest earned on mortgage loans. mREITs like AGNC Investment Corp and Annaly Capital Management typically offer very high dividend yields, but they’re also more sensitive to interest rate changes and can be volatile.

Hybrid REITs

Hybrid REITs combine both strategies — owning properties and holding mortgages. They’re less common but offer a blend of the income characteristics of both equity and mortgage REITs.

REIT Sectors to Know

Within equity REITs, there are numerous property sectors: office, retail, industrial, residential (apartments), healthcare (hospitals, senior housing), data centers, infrastructure (cell towers, fiber), and self-storage. Each sector has its own economic drivers and risk profile.

Top Individual REITs to Know

Here are some of the most widely held and recognized publicly traded REITs:

• Prologis (PLD) — The world’s largest industrial REIT, benefiting from e-commerce and logistics demand.
• American Tower (AMT) — Owns and operates wireless tower infrastructure globally.
• Realty Income (O) — Known as “The Monthly Dividend Company,” Realty Income pays monthly dividends from a diversified net-lease portfolio.
• Equinix (EQIX) — A data center REIT riding the wave of cloud computing and AI infrastructure demand.
• AvalonBay Communities (AVB) — A large residential REIT owning apartment communities in high-cost metro areas.
• Public Storage (PSA) — The dominant player in self-storage, a recession-resilient property type.

How to Invest in REITs: The ETF Route (VNQ)

For most investors, the simplest and most efficient path to REIT investing is through an ETF. The Vanguard Real Estate ETF (VNQ) is the gold standard:

• AUM: Over $35 billion
• Expense ratio: 0.13% (very low)
• Holdings: 160+ publicly traded U.S. REITs
• Dividend yield: Typically 3–4% annually

VNQ gives you instant diversification across every major REIT sector in a single trade. Other solid REIT ETFs include Schwab U.S. REIT ETF (SCHH), iShares U.S. Real Estate ETF (IYR), and Real Estate Select Sector SPDR Fund (XLRE).

To buy VNQ or any individual REIT, you simply open a brokerage account, search the ticker, and place a buy order — the same way you’d buy a stock.

Why REITs Belong in a Portfolio

REITs offer several compelling advantages:

• Income: Consistent, above-average dividend yields from rental income.
• Inflation hedge: Property values and rents tend to rise with inflation over time.
• Diversification: Real estate often moves differently from stocks and bonds.
• Liquidity: Unlike owning physical property, you can sell REIT shares in seconds.
• Accessibility: Start with as little as $1 on platforms that offer fractional shares.

REIT Tax Treatment: What You Need to Know

This is where REITs diverge significantly from regular stocks. Because REITs pay out most of their income rather than reinvesting it, their dividends are structured differently:

• Ordinary income dividends: The majority of REIT dividends are classified as ordinary income, taxed at your regular marginal rate (up to 37%).
• Qualified dividends: A small portion may qualify for lower long-term capital gains rates (0%, 15%, or 20%).
• Return of capital: Some REIT distributions are classified as return of capital, which reduces your cost basis (tax-deferred until you sell).
• Section 199A deduction: Individual REIT investors may be able to deduct up to 20% of their qualified REIT dividends under the pass-through deduction rules. This makes REITs more tax-efficient than they appear at first glance.

Pro tip: Hold REITs in a tax-advantaged account (Roth IRA, Traditional IRA) when possible to avoid annual ordinary income taxes on dividends.

REITs vs. Direct Real Estate

Owning a rental property can build wealth, but it requires capital, credit, property management, maintenance, and ongoing work. REITs offer nearly all the financial benefits — appreciation potential, rental income, inflation protection — without the headaches. The trade-off is that you’re a passive owner with no control over the properties, and REIT share prices can be volatile in the short term.

How to Get Started

1. Open a brokerage or robo-advisor account (M1 Finance, Fidelity, Schwab, Vanguard)
2. Decide: broad ETF (VNQ) or individual REITs?
3. For most investors, start with VNQ for diversification
4. Consider holding REITs in a tax-advantaged account
5. Reinvest dividends to compound returns over time

Real estate has built generational wealth for centuries. REITs put that opportunity within reach for anyone with a brokerage account.

---

Disclosure: This article may contain affiliate links. We may earn a commission if you click through and make a purchase, at no additional cost to you. All opinions are our own. See our Editorial Policy for details.