Overview of REITs

What Are REITs?

A real estate investment trust, or REIT, is a company that owns, operates, or finances income-producing real estate. Investors hold shares in the company rather than buying a particular building themselves. As Investor.gov explains, this structure gives individuals access to commercial real estate income without requiring them to purchase and manage an entire property. The underlying assets can include apartments, offices, warehouses, shopping centers, healthcare facilities, and real estate loans.

The company pools investors' capital and makes decisions about its portfolio. Shareholders participate through distributions and changes in the value of their shares. They do not collect individual tenants' rent or choose which repairs to make. This separates owning a real estate security from being a direct landlord, while retaining exposure to the economic results of the properties or loans involved.

REIT describes a tax structure, not a single property type or a promise of safety. A company must meet federal requirements to qualify. Its investment strategy and the way its shares are offered are separate questions: a property-owning REIT may be listed on an exchange, publicly offered without an exchange listing, or privately offered.

How Do REITs Earn and Distribute Income?

A property-owning REIT earns revenue primarily from tenants using its buildings or land. A mortgage REIT earns income from loans or mortgage-related investments. Revenue is not the same as money available for shareholders: property expenses, financing costs, and other obligations also affect the business. The income source therefore matters as much as the fact that a company pays a dividend.

Under 26 U.S.C. 857(a), the distribution requirement generally starts with at least 90% of REIT taxable income, calculated before the dividends-paid deduction and excluding net capital gain. The statutory calculation also addresses after-tax foreclosure income and excess noncash income. The familiar 90% shorthand is a tax qualification rule. It does not mean 90% of rent, revenue, accounting earnings, or the amount someone invested.

The IRS instructions for Form 1120-REIT explain how the distribution requirement and dividends-paid deduction fit into the REIT's tax return. Qualifying distributions can reduce income subject to corporate tax, but REIT status does not exempt every kind of income or transaction from tax. Shareholder taxation is a separate question from the company's qualification and depends on the distribution and the investor's circumstances.

The requirement does not set a fixed dividend per share or require monthly payments. A company's payout can change as its taxable income and financial circumstances change. A distribution is also not proof that the business earned an equivalent amount in cash. Investor.gov warns that some non-traded REITs fund distributions using borrowing or offering proceeds, making the source of payments an important part of understanding them.

What Must a Company Do to Qualify as a REIT?

The qualification tests in 26 U.S.C. 856 address organization, ownership, income, and assets. A qualifying entity generally must be managed by directors or trustees, have transferable ownership interests, and otherwise be taxable as a domestic corporation. REIT status involves an election and continuing compliance, rather than simply putting real estate in a company's name.

• At least 75% of gross income generally must come from specified real estate sources, including qualifying rents and mortgage interest. A separate 95% test includes those sources and other qualifying investment income, such as dividends and interest.
• At each quarter end, at least 75% of total asset value generally must consist of real estate assets, cash and cash items, and government securities. Additional limits apply to other securities and particular holdings.
• The ownership rules generally require at least 100 shareholders and prevent five or fewer individuals from owning more than 50% in value during the last half of the taxable year. First-year exceptions and attribution rules affect these tests.

The IRS qualification instructions describe how these requirements work together, including the timing of ownership tests. The percentages are not a complete formation checklist: definitions, exceptions, subsidiary rules, and relief provisions also matter. The annual distribution rule belongs alongside these tests, not in place of them. This overview explains the framework and is not tax or legal advice.

Equity REITs and Mortgage REITs

The SEC's REIT bulletin distinguishes equity REITs, mortgage REITs, and hybrids. Equity REITs generally own and operate property. Their business depends on the real estate portfolio: whether space is occupied, whether tenants pay, and what it costs to operate and finance the assets. Property sales can also affect results, but owning a rental portfolio is different from a business focused on building properties for resale.

Mortgage REITs provide real estate financing, directly through loans or indirectly through mortgage-backed securities. Their assets are financial claims connected to real estate, rather than primarily a collection of leased buildings. Borrower credit, financing arrangements, and changes in interest rates affect this model. The SEC notes that mortgage REITs often use substantial borrowing and may use derivatives to manage risks.

A hybrid combines property ownership and mortgage investment strategies. These categories describe the assets and income sources, while listed or non-traded describes the shares. Neither label alone explains a company's complete exposure. Its filings provide the detail needed to distinguish the businesses behind two securities that both carry the REIT name.

Listed, Public Non-traded, and Private REITs

Listed REIT shares trade on a stock exchange and can be bought or sold through a brokerage account. Public market prices make it possible to observe what buyers and sellers currently pay. Exchange trading provides a way to sell shares without selling the REIT's buildings, but it does not guarantee the price an investor receives or prevent a loss.

Public non-traded REITs register with the SEC and file reports, but their shares do not trade on an exchange. The SEC's non-traded REIT bulletin explains that redemption programs can have significant limits or be discontinued. Estimated share values are not the same as a continuously available market price. Fees, valuation procedures, and the terms for withdrawing money are important distinctions from exchange-traded shares.

Private REIT offerings rely on registration exemptions and generally do not provide the same regular public disclosures as registered REITs. They are also not exchange-listed. Eligibility depends on the offering exemption and is often restricted to accredited investors. The SEC's private placement bulletin explains that exempt offerings can have limited disclosure and restricted resale. A registration exemption is a legal offering category, not an endorsement of the investment or a guarantee that an investor can exit.

Property Sectors and Related Real Estate Markets

The sector map connects each investment to the properties or loans behind it. Hoya Capital's sector research describes the activities below. These categories do not all represent the same kind of exposure: some identify a property use, others a financing strategy, lease structure, or geography. Related housing businesses can appear alongside REITs without themselves qualifying as REITs.

• Residential property includes apartments, single family rentals, manufactured housing, and student housing. Apartment owners lease units in multifamily buildings; single family rental owners lease houses. Manufactured housing portfolios can include land leased to homeowners as well as rental homes. These are distinct ways of providing residential space.
• Retail coverage includes malls and strip centers. Both lease space to businesses serving customers, while open-air centers and enclosed shopping destinations have different layouts and tenant mixes. Net lease identifies a lease approach in which tenants bear specified property expenses, and can span several building types.
• Commercial workplaces include office buildings and industrial properties. Offices provide space for business activity; industrial portfolios include warehouses, distribution buildings, and logistics facilities. The identity of the tenants and the use of the buildings help explain how demand for one category can differ from another.
• Digital infrastructure includes data centers and cell towers. Data centers supply facilities for computing equipment, including space, power, and connectivity. Tower owners lease infrastructure space to wireless carriers. These properties connect the real estate business to the equipment and networks their customers operate.
• Service-oriented property includes healthcare, hotels, and self-storage. Healthcare portfolios can contain medical offices, senior housing, and other care facilities. Hotels serve travelers and groups, while storage facilities rent units to households and businesses. The operator, user, and payment arrangements differ across these categories.
• Specialized coverage includes casino real estate, cannabis properties, timberland, billboards, and farmland. Casino landlords lease facilities to gaming operators; cannabis landlords lease specialized space to industry tenants. Timber businesses manage forestland and can earn income from timber and land activities, rather than a conventional office or apartment rent roll.
• Real estate financing is covered through commercial mortgage REITs and residential mortgage REITs. The distinction follows the loans and mortgage-related assets involved. It is a different classification from the property sectors above because the investment can be in debt rather than direct ownership of buildings.
• Related research includes homebuilders, whose business involves constructing and selling homes, and Canadian REITs, a geographic grouping covering multiple property types. Homebuilders should not automatically be classified as REITs. The U.S. tax qualification rules explained here should not be assumed to govern a Canadian trust.

The linked reports provide more detail on each business model. A sector name is a starting description, not a complete risk assessment. Properties in the same category can have different locations, tenants, financing, and lease terms, so a sector overview cannot replace the disclosures for an individual company.

How Investors Access REITs

At a high level, investors can buy shares of an individual listed REIT through a broker, or obtain exposure through a mutual fund or exchange-traded fund that holds real estate securities. An individual share represents an interest in one company; a fund share represents an interest in the fund's portfolio. A fund's actual holdings determine which companies and property sectors it covers.

The SEC's ETF explanation describes pooled portfolios, exchange trading, fees, and the possibility that a trading price differs from net asset value. A real estate label alone does not establish a fund's holdings or costs. The prospectus sets out its objective, approach, principal risks, and expenses. Non-traded and private offerings have their own purchase and withdrawal terms rather than the same trading process as a listed share.

Company research starts with understanding the business and its finances. The SEC's guide to annual and quarterly reports explains where companies discuss operations, financial statements, and risk factors. Hoya Capital's REIT database and Income Builder research provide additional context. A data display or research article does not replace the issuer's filings or determine whether a security suits a particular person's needs.

Why Investors Consider REITs

The appeal described in this overview has three parts: participation in real estate income, potential changes in investment value, and access without directly managing buildings. Listed shares also provide exchange liquidity. These are features of the structure, not assured outcomes. Distributions may fall, share prices may decline, and the convenience of owning shares does not remove the underlying real estate risks.

Diversification means spreading exposure across investments rather than relying on one source of results. REIT portfolios can span properties, tenants, and locations, but a specialized company or real estate fund may still be concentrated. The SEC's asset allocation guidance distinguishes diversification within an asset category from spreading investments across categories. Owning several buildings is not automatically the same as having a diversified overall portfolio.

REIT Risks: Rates, Leverage, and Concentration

The SEC's publicly traded REIT bulletin explains that property specialization, borrowing, and changes in interest rates affect REIT investments. Mortgage REITs can also face risks from leverage and hedging strategies. Investors should review the company's filings to understand its particular exposures.

• Interest rates: higher rates can increase financing costs and change what investors will pay for real estate income. Mortgage investments can also face refinancing and reinvestment effects when rates fall. Direction and magnitude depend on the assets and their financing.
• Leverage: borrowing creates obligations that remain when property income or asset values weaken. It can magnify the consequences of adverse changes. Debt maturities and the availability of refinancing are part of the financial picture, not just the current dividend.
• Property and credit exposure: vacancies, unpaid rent, borrower defaults, and rising expenses can reduce cash available to a business. Concentration in one sector, tenant group, or location can expose multiple holdings to the same adverse conditions.

Liquidity is a separate risk: being unable to sell when needed differs from being able to sell only at a lower price. Non-traded share restrictions and listed share volatility require different explanations. As Investor.gov's risk overview notes, investment risk includes uncertainty and potential loss. Neither real estate ownership nor a distribution requirement eliminates that possibility.

REIT History: The 1960 Legislation

According to Nareit's history of REITs, Congress created the U.S. REIT framework in 1960 to broaden access to income-producing real estate. President Dwight D. Eisenhower signed the legislation on September 14, 1960, as part of the Cigar Excise Tax Extension. The idea was to let investors participate in large real estate portfolios through an investment vehicle rather than requiring them to assemble and manage those properties themselves.

That origin explains the emphasis on shared access and distributions. It does not mean that today's REITs all use the same strategy, or that the original legislation alone describes current qualification rules. The statutory and IRS sources above address the present U.S. tax framework; the sector reports illustrate how varied the underlying businesses can be.

Conclusion: Understand the Structure and the Business

REITs connect investors with real estate ownership or financing through company shares. Understanding them means separating the tax rules, the income-producing assets, and the terms on which shares can be bought or sold. Income, potential appreciation, liquidity, and diversification all depend on the specific investment. This guide is educational and does not recommend a security, portfolio allocation, or tax strategy.

Related Guides

• How to Invest in REITs: Account types, individual REITs versus funds, and the metrics investors review.
• REIT ETFs: How index REIT ETFs work, with a dated table of major US REIT funds.
• How Are REITs Taxed?: How REIT dividends are reported and taxed, including inside IRAs.
• How to Start a REIT: The qualification tests, the REIT election and common structures.
• Top 25 REITs: The largest REITs ranked by market capitalization.

Sources

• Investor.gov: Real Estate Investment Trusts
• SEC Investor Bulletin: Real Estate Investment Trusts
• 26 U.S.C. 856: REIT definition and qualification tests
• 26 U.S.C. 857: REIT taxation and distribution requirement
• IRS: Instructions for Form 1120-REIT
• Investor.gov: Non-traded REITs
• Investor.gov: Private Placements under Regulation D
• Hoya Capital: Property sector definitions and research
• Investor.gov: Exchange-Traded Funds
• Investor.gov: How to Read a 10-K/10-Q
• Investor.gov: Asset Allocation and Diversification
• Investor.gov: What Is Risk?
• Investor.gov: Investor Bulletin: Publicly Traded REITs
• Nareit: The History of REITs

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