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REIT — rhymes with “sweet”— stands for real estate investment trust, and its popularity is growing for investors who seek to expand their portfolio beyond publicly traded company stocks or mutual funds.
REITs are companies that own (and often operate) income-producing real estate, such as apartments, warehouses, self-storage facilities, malls and hotels. Their appeal is simple: The most reliable REITS have a track record for paying large and growing dividends. Still, that potential for growth carries risks that vary depending on the type of REIT.
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:
By hewing to these rules, REITs don’t have to pay tax at the corporate level, which allows them to finance real estate more cheaply than non-REIT companies can. This means that over time, REITs can grow bigger and pay out even larger dividends.
» Related: Understand
REITs fall into three broad categories divided by their investment holdings: equity, mortgage and hybrid REITs. Each category can further be divided into three types that speak to how the investment can be purchased: publicly traded REITs, public non-traded REITs and private REITs.
Each REIT type has different characteristics and risks, so it’s important to know what’s under the hood before you buy.
Equity REITs: Equity REITs operate like a landlord. They own the underlying real estate, provide upkeep of and reinvest in the property and collect rent checks — all the management tasks you associate with owning a property.
Mortgage REITs: Unlike equity REITs, mortgage REITs (also known as mREITs) don't own the underlying property. Instead, they own debt securities backed by the property. For example, when a family takes out a mortgage on a house, this type of REIT might buy that mortgage from the original lender and collect the monthly payments over time. Meanwhile, someone else — the family, in this example — owns and operates the property.
Mortgage REITs are usually significantly more risky than their equity REIT cousins, and they tend to pay out higher dividends.
Hybrid REITs: Hybrid REITs are a combination of both equity and mortgage REITs. These businesses own and operate real estate properties as well as own commercial property mortgages in their portfolio. Be sure to read the REIT prospectus to understand its primary focus.
» Which is better?
Publicly traded REITs: As the name suggests, publicly traded REITs are traded on an exchange like stocks and ETFs, and are available for purchase using an ordinary brokerage account. There are more than 200 publicly traded REITs on the market, according to the National Association of Real Estate Investment Trusts, or Nareit.
Publicly traded REITs tend to have better governance standards and be more transparent. They also offer the most liquid stock, meaning investors can buy and sell the REIT’s stock readily — much faster, for example, than investing and selling a retail property yourself. For these reasons, many investors buy and sell only publicly traded REITs.
Public non-traded REITs: These REITs are registered with the SEC but are not available on an exchange. Instead, they can be purchased from a broker that participates in public non-traded offerings, such as . (Nareit maintains an online database where investors can ). Because they aren’t publicly traded, these REITs are highly illiquid, often for periods of eight years or more, according to the Financial Industry Regulatory Authority.
Non-traded REITs also can be hard to value. In fact, the SEC warns that these REITs often don’t estimate their value for investors until 18 months after their offering closes, which can be years after you’ve invested.
Several online trading platforms allow investors to purchase shares in public non-traded REITs, including , the Diversy Fund and
Private REITs: Not only are these REITs unlisted, making them hard to value and trade, but they also generally are exempt from SEC registration: As such, private REITs have fewer disclosure requirements, potentially making their performance harder to evaluate. These limitations make these REITs less attractive to many investors, and they carry additional risks. (See this .)
Public non-traded REITs and private REITs also can have much higher account minimums — $25,000 or more — to begin trading, and steeper fees than publicly traded REITs. For that reason, private REITs and many non-traded REITs are open only to accredited investors with a net worth (excluding the value of their primary residence) of $1 million or more, or annual income in each of the past two years of at least $200,000 if single or $300,000 if married.
Here are some of the top performing publicly listed REITs so far this year:
Rather than purchase individual REITs, you can also invest in REIT mutual funds and ETFs to get instant diversification at an affordable price. Here are some top performing property-focused mutual funds and ETFs the past year:
All data current as of September 2, 2021. Sources: Nariet, Morningstar and ETF.com.
Nareit notes that during the 20-year period ending December 2019, the FTSE NAREIT All Equity REITs index — which collects data on all publicly traded equity REITs — outperformed the Russell 1000, a stock market index of large-cap stocks. The REIT indexed investments showed total returns of 11.6% annually versus the Russell 1000’s 6.29%.
There are advantages to investing in REITs, especially those that are publicly traded:
Getting started is as simple as, which usually takes just a few minutes. Then you’ll be able to buy and sell REITs just as you would any other stock. Because REITs pay such large dividends, it can be smart to keep them inside a tax-advantaged account like an IRA, so you defer on the distributions.
If you don’t want to trade individual REIT stocks, it can make a lot of sense to simply buy that vets and invests in a range of REITs for you. You get immediate diversification and lower risk. Many brokerages offer these funds, and investing in them requires less legwork than researching individual REITs for investment.
Former NerdWallet writer Jim Royal contributed to this article.
Disclosure: The author held no positions in the aforementioned securities at the original time of publication.