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INVESTING REITs: How to Invest in Real Estate Without Buying P... 2026-02-27 · 4 min read · REITs · real estate investing · dividends

REITs: How to Invest in Real Estate Without Buying Property

investing 2026-02-27 · 4 min read REITs real estate investing dividends passive income portfolio diversification

Real estate is one of the most reliable wealth-building assets in history. But buying property requires a large down payment, active management, and geographic concentration. REITs — Real Estate Investment Trusts — give you access to real estate returns without any of that.

What Is a REIT?

A REIT is a company that owns income-producing real estate. Congress created the structure in 1960 specifically to let ordinary investors participate in commercial real estate markets. By law, REITs must:

That last requirement is why REITs are known for high dividend yields. They can't hoard cash — they must distribute it. Historically, REIT dividends have averaged 4–6% annually, well above the S&P 500's typical 1.5%.

You can buy most REITs on stock exchanges the same way you buy shares of Apple or McDonald's. Minimum investment: whatever one share costs, sometimes under $20.

Types of REITs

Not all REITs invest in the same properties. The major categories:

Equity REITs own and operate physical properties. Subcategories include:

Mortgage REITs (mREITs) don't own property — they invest in mortgages and mortgage-backed securities. They profit from the spread between borrowing rates and lending rates. Higher dividend yields but significantly more interest-rate risk than equity REITs.

Hybrid REITs combine both approaches.

For most investors, equity REITs in growing sectors are the most straightforward choice.

How to Evaluate a REIT

Standard stock metrics like P/E ratio don't work well for REITs because depreciation distorts earnings. Use these instead:

Funds From Operations (FFO): The REIT standard for earnings. FFO adds depreciation back to net income and subtracts gains from property sales. Look for consistent FFO growth.

Adjusted FFO (AFFO): FFO minus capital expenditures needed to maintain properties. This is a better measure of sustainable dividend capacity.

Payout ratio: Dividends divided by AFFO. A ratio under 80% suggests the dividend is sustainable; over 90% warrants caution.

Debt-to-EBITDA: REITs are capital-intensive and carry debt. Generally, under 6x is manageable; over 8x increases risk.

Occupancy rate: Higher is better. Stable occupancy (95%+) in established sectors is a good sign.

Dividend history: Has the REIT maintained or grown its dividend through recessions? Companies like Realty Income have paid uninterrupted monthly dividends for decades.

REITs in Your Portfolio

REITs tend to have low correlation with other stock categories over long periods, providing genuine diversification benefits. Historical data shows a portfolio with 10–20% REIT allocation has often achieved higher risk-adjusted returns than a pure stock portfolio.

The easiest way to add REIT exposure:

REIT index funds and ETFs: Vanguard Real Estate ETF (VNQ) holds 160+ REITs for a 0.12% expense ratio. Schwab US REIT ETF (SCHH) and iShares Core US REIT ETF (USRT) are similar low-cost options. These give broad diversification without needing to analyze individual REITs.

Individual REITs: If you want to concentrate in specific sectors, research individual names. Well-established options include Realty Income (O), Public Storage (PSA), and Prologis (PLD), though always do your own due diligence.

REIT mutual funds: Available in many 401(k) plans when ETFs aren't an option.

Tax Considerations

REIT dividends are mostly taxed as ordinary income, not at the lower qualified dividend rate. This means REITs are better held in tax-advantaged accounts (IRA, 401k) than taxable brokerage accounts when possible.

The exception: REITs do often pass through some return-of-capital and capital gains distributions that receive preferential tax treatment. Tax reporting for REITs comes on Form 1099-DIV and can be more complex than regular stock dividends — worth noting if you hold many individual REITs.

Under the Tax Cuts and Jobs Act, REIT dividends in taxable accounts qualify for a 20% deduction under Section 199A, partially offsetting the ordinary income rate disadvantage.

What REITs Won't Do

REITs don't give you the leverage benefits of directly owning property. When you buy rental property with a mortgage, you control a $400,000 asset with $20,000 down — 20x leverage. REITs don't work that way.

REITs also tend to underperform during rising interest rate environments (higher rates mean higher borrowing costs and competition from bonds for income-seeking investors). During the 2022 rate hike cycle, many REITs dropped 25–40% even as their underlying properties retained value.

That said, for investors who want real estate exposure without capital, debt, or management responsibility, REITs offer a practical and liquid alternative. Start with a broad ETF like VNQ, understand what you own, and consider it one component of a diversified portfolio rather than a standalone strategy.