What Is a REIT? Real Estate Investing in the Stock Market

A REIT — real estate investment trust — is a company that owns, operates, or finances income-producing real estate. REITs let you invest in real estate the same way you buy any stock: through your brokerage account, in any dollar amount, with full liquidity. No tenants, no maintenance calls, no property management — just a share of the rental income and property appreciation.

How REITs Work

REITs pool investor capital to buy and manage real estate — office buildings, shopping centers, apartments, hospitals, data centers, warehouses, cell towers, and more. The rental income from tenants flows through to shareholders as dividends.

The defining feature of a REIT is a legal requirement to distribute at least 90% of taxable income as dividends to shareholders. In exchange, the REIT pays no corporate income tax on the distributed earnings. This pass-through structure means REITs typically offer higher dividend yields than most stocks — often 3-6% or more.

Because they distribute most of their income, REITs have limited retained earnings for growth. They fund expansion primarily through issuing new shares (equity) or borrowing (debt), making capital markets access and balance sheet management critically important.

Types of REITs

Equity REITs

The most common type. Equity REITs own and operate real property — they collect rent from tenants and may benefit from property value appreciation over time. Most publicly traded REITs are equity REITs. Their returns come from a combination of rental income (dividends) and property value growth (stock price appreciation).

Mortgage REITs

Mortgage REITs don't own property — they finance it. They lend money to property buyers or invest in mortgage-backed securities, earning the spread between their borrowing cost and the interest they receive. Mortgage REITs tend to offer very high yields but carry significant interest rate risk and are far more volatile than equity REITs.

Specialty REITs

Modern REITs extend far beyond traditional real estate. Data center REITs own the facilities that house cloud computing infrastructure. Cell tower REITs own wireless communication towers. Infrastructure REITs own fiber optic networks. These specialty REITs often have moat characteristics — switching costs, efficient scale, or mission-critical infrastructure — that traditional real estate lacks.

Evaluating REIT Quality

We've found that standard metrics like P/E and ROIC don't work well for REITs because depreciation (a major non-cash charge for property-heavy companies) distorts earnings. Instead, REIT investors use specialized metrics.

Funds from operations (FFO) adds depreciation back to net income, providing a clearer picture of cash generation. Price-to-FFO replaces P/E as the primary valuation metric. Adjusted funds from operations (AFFO) further subtracts maintenance capital expenditures, giving the truest picture of distributable cash flow.

Occupancy rate measures what percentage of the REIT's properties are leased — higher is better. Same-store revenue growth shows whether existing properties are generating more income over time. Debt-to-EBITDA measures leverage, which is particularly important for REITs since they rely heavily on debt financing.

REIT Risks

Interest rate sensitivity is the biggest risk. REITs use significant debt, so rising rates increase borrowing costs. Higher rates also make bond yields more competitive with REIT dividends, potentially driving capital away from REITs. This is why REITs often underperform during rate-hiking cycles.

Property-specific risks vary by sector. Office REITs face remote work disruption. Retail REITs face e-commerce competition. Hotel REITs face economic cyclicality. The best REITs own property types with structural demand tailwinds and limited supply — like data centers and logistics warehouses.

Dividend sustainability depends on occupancy, rent growth, and debt management. A REIT paying out more than 100% of AFFO is funding its dividend with debt or equity issuance — unsustainable long-term. Check the AFFO payout ratio the same way you'd check FCF payout for a regular stock.