Published by NerdWallet | June 3, 2025
Real estate investment trusts (REITs) let you invest in real estate without buying and managing properties yourself.
Real estate investment trusts (REITs) are companies that own real estate. You can buy shares in REITs, and you mainly make money from REITs through dividends. REITs often own apartments, warehouses, self-storage facilities, malls and hotels. You can purchase many REITs through a brokerage account, similar to how you might purchase stocks.
How does a real estate investment trust (REIT) work?
Congress created real estate investment trusts in 1960 as a way for individual investors to own equity stakes in large-scale real estate companies, just as they could own stakes in other businesses. This move made it easy for investors to buy and trade a diversified real-estate portfolio.
REITs are required to meet certain standards set by the IRS, including that they:
- Return a minimum of 90% of taxable income in the form of shareholder dividends each year. This is a big draw for investor interest in REITs.
- Invest at least 75% of total assets in real estate or cash.
- Receive at least 75% of gross income from real estate, such as real property rents, interest on mortgages financing the real property or from sales of real estate.
- Have a minimum of 100 shareholders after the first year of existence.
- Have no more than 50% of shares held by five or fewer individuals during the last half of the taxable year.
By adhering to these rules, REITs don’t have to pay tax at the corporate level, which allows them to retain more of their profits, be less reliant on debt and thus have lower financing costs. Less tax also means more profit to disburse to investors. Accordingly, over time, REITs can grow bigger and pay out even larger dividends.
What is the average return on a REIT?
When comparing potential returns to determine whether REITs are a good investment for you, it can be helpful to look at benchmarks.
- The S&P 500 is an index that measure the performance of a collection of 500 of the biggest U.S. companies. As of June 4, 2025, the three-year total return on this index was 15.01% and the five-year total return was 15.66%
- The FTSE NAREIT All Equity REITs Index, similarly, tracks the performance of equity REITs. As of May 30, 2025, the three-year total return on this index was 2.7% and the five-year total return was 41.3%
That’s not to say that REITs are better or worse than stocks — benchmarks are simply one metric to look at. That being said, REITs can be a way to diversify your portfolio.
