I still remember the first time someone mentioned REITs to me. I was in my early twenties, sitting at a coffee shop with a friend who seemed way more financially literate than I was at the time. He leaned across the table and said, “You know you can invest in real estate without ever having to deal with a leaky roof or collect rent checks, right?” I laughed, assuming he was joking. Turns out, he wasn’t. What he was describing was a Real Estate Investment Trust, better known as a REIT.
For a beginner, the concept can feel a little abstract. Real estate has always been thought of as something tangible—you buy a house, you rent it out, you manage it. But REITs flip that idea on its head. They make it possible for regular people, with modest amounts of money, to own a slice of the real estate market without ever stepping foot inside a property manager’s office.
Let’s break this down in a way that’s approachable, a bit less textbook, and maybe even a little entertaining.
What Exactly Is a REIT?
Think of a REIT as a company that owns, operates, or finances income-producing real estate. It’s like a mutual fund, but instead of pooling money to buy stocks in hundreds of companies, investors pool money to buy shares in a trust that invests in buildings and property-related assets.
The portfolio might include apartment complexes in New York City, shopping malls in Florida, medical office buildings in Texas, or even data centers that quietly power your favorite streaming platform. You, as an investor, don’t own the properties directly—you own shares of the REIT. And that gives you exposure to all the rent and income those properties generate.
If you’ve ever walked past a hospital, hotel, or storage facility, there’s a good chance it’s connected to a REIT somewhere. In fact, they’re woven into everyday life far more than most people realize.
Why REITs Were Created in the First Place
The story of REITs starts back in 1960 when the U.S. Congress passed legislation allowing ordinary investors to access large-scale commercial real estate. Before then, real estate investing was a playground mostly reserved for the wealthy. Buying a skyscraper or a chain of hotels wasn’t exactly within reach for the average person.
The creation of REITs essentially democratized the space. Just like mutual funds gave smaller investors access to the stock market, REITs opened the door to real estate. It was a way to let someone with a few hundred dollars participate in income-generating property without the headaches of being a landlord.
How Do REITs Work Day-to-Day?
Here’s the general setup. A REIT collects money from investors, buys properties (or in some cases mortgages), and earns income primarily through rent payments or loan interest.
By law, REITs have to pay out at least 90% of their taxable income back to shareholders in the form of dividends. That’s not just a suggestion—it’s a requirement. Which means investors often see consistent payouts, sometimes higher than what you’d get from an average stock.
For example, if a REIT owns a portfolio of shopping centers, the rent that stores like Target or grocery chains pay every month gets funneled into the trust. After expenses, a big chunk of that money goes directly to investors.
It’s almost like you’re getting a slice of rent checks from tenants all over the country, even though you’ve never met them and probably never will.
Types of REITs You’ll Run Into
Not all REITs are the same. They tend to fall into a few categories, and knowing the difference helps you figure out where your money is actually going.
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Equity REITs: These are the most common. They own and operate properties like apartments, hotels, shopping malls, and office buildings. Income comes mainly from rent.
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Mortgage REITs (mREITs): Instead of owning physical property, they invest in mortgages and mortgage-backed securities. The money you earn here comes from interest on those loans.
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Hybrid REITs: A mix of both. They own properties but also dabble in mortgages.
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Publicly traded REITs: Bought and sold like stocks on major exchanges, easy for most beginners to access.
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Private REITs: Not traded on exchanges, often less liquid, usually for more experienced or accredited investors.
A beginner is most likely to come across publicly traded equity REITs—those are the ones sitting inside brokerage accounts and even retirement portfolios.
The Upsides of Investing in REITs
There are a few reasons people get excited about REITs, and they’re worth highlighting.
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Dividend income – Because of the 90% payout rule, REITs are known for generous dividends. For retirees or anyone looking for passive income, that can be appealing.
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Diversification – Instead of buying just tech stocks or focusing only on bonds, adding real estate exposure can balance out a portfolio. Real estate often doesn’t move in lockstep with the stock market.
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Accessibility – You don’t need $100,000 to buy a building. You can start with a single share of a REIT.
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Liquidity – Unlike owning a physical building, you can sell REIT shares on the stock market relatively quickly.
I personally found the dividend angle fascinating when I first started learning. There’s something satisfying about seeing that quarterly payout hit your account and knowing it’s tied to tangible assets like an apartment complex or office tower—even if you’ll never step inside it.
The Downsides (Because No Investment Is Perfect)
Of course, REITs aren’t some magical, risk-free path to wealth.
One drawback is that because they’re required to pay out most of their income, they don’t have much left over to reinvest. This can limit growth compared to a company like Apple, which reinvests billions into new products.
They’re also sensitive to interest rates. When rates rise, borrowing costs go up, which can eat into profits. And sometimes, investors shift toward bonds when yields climb, pulling money out of REITs.
Another thing people don’t always think about: the underlying properties can struggle. Take retail REITs, for instance. Malls were once a booming investment, but as more people shop online, those properties face vacancies. If a REIT is heavily invested in malls, its performance may drag.
And then there’s taxation. REIT dividends are usually taxed as ordinary income, which might be higher than the rate on qualified dividends from stocks. It doesn’t make them bad—it just makes them something you need to think about when planning.
How to Actually Buy REITs
Here’s the part where beginners often feel relieved: buying a REIT isn’t complicated. If you’ve ever bought a stock, you can buy a REIT. They trade on major exchanges like the NYSE and NASDAQ. Just type the ticker symbol into your brokerage account, decide how many shares you want, and hit buy.
There are also REIT-focused ETFs (exchange-traded funds) that bundle together dozens of REITs in one package. That can be a good way to spread risk if you’re nervous about picking a single company.
If you’re more adventurous—or if you have access—you might explore private or non-traded REITs. But for most beginners, sticking with the publicly traded options is the easiest way to get started.
A Small Anecdote: My First REIT Purchase
The first REIT I ever bought wasn’t glamorous. It was a company that owned self-storage facilities. At first, I thought it sounded boring. Who gets excited about storage units? But then I realized something: people always need space. Whether they’re moving, downsizing, or just accumulating too much stuff, the demand doesn’t disappear.
That REIT ended up being one of the steadiest performers in my early portfolio. It taught me that sometimes the “boring” parts of the economy are the most reliable. Not every investment has to be flashy to be effective.
Who Should Consider REITs?
REITs aren’t for everyone, but they can make sense for a wide range of people. If you’re someone who:
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Wants steady income through dividends
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Needs diversification beyond just stocks and bonds
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Likes the idea of real estate but doesn’t want to be a landlord
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Has a long-term horizon and can handle market swings
…then REITs might deserve a spot in your portfolio.
On the flip side, if you’re allergic to volatility or need growth that outpaces inflation dramatically, you might find them a little underwhelming.
A Balanced Way to Think About REITs
When people talk about REITs, they sometimes oversell them. You’ll hear stories about “passive income” and “financial freedom” as if buying a few shares will suddenly transform your life. The reality is less glamorous.
REITs are a tool. A potentially useful one, yes, but they’re not a silver bullet. They can play an important role in building a portfolio that feels balanced, but they shouldn’t be the only thing you invest in. Just like you wouldn’t want to eat only one food forever, you probably don’t want to rely solely on REITs.
Final Thoughts
When I think back to that coffee shop conversation years ago, I’m grateful my friend introduced me to REITs. They opened my eyes to a different way of thinking about real estate—one that doesn’t involve fixing toilets or chasing tenants for rent.
For beginners, REITs can be a surprisingly straightforward entry point into real estate investing. They give you access to some of the world’s most valuable properties while letting you stay comfortably on the sidelines.
If you’re curious about building a portfolio that includes more than just stocks and bonds, REITs are worth a closer look. Just keep your expectations realistic, pay attention to the type of REIT you’re investing in, and remember that boring can sometimes be beautiful when it comes to steady returns.