Have you ever wanted to own a piece of a shopping center, an apartment complex, or maybe even a hospital? The traditional path to real estate investing usually means scraping together a massive down payment, dealing with tenants, fixing toilets at midnight, and hoping your property doesn't sit empty for months.

There's another way. Real Estate Investment Trusts—REITs—let you invest in property portfolios the same way you'd buy shares of Apple or Google. No tenants. No maintenance calls. No six-figure down payments. Just ownership of real estate assets through your regular brokerage account. Let's break down how this works and whether it belongs in your portfolio.

A REIT is essentially a company that owns, operates, or finances income-producing real estate. Think office buildings, warehouses, cell towers, data centers, apartment complexes, or hospitals. When you buy shares of a REIT, you're buying fractional ownership in that entire portfolio of properties.

Here's what makes REITs special: to qualify for favorable tax treatment, they must distribute at least 90% of their taxable income to shareholders as dividends. This isn't optional—it's a legal requirement. That's why REITs typically offer higher dividend yields than most stocks. The income from rent payments flows almost directly to you.

Most individual investors buy publicly traded REITs, which trade on major exchanges just like regular stocks. You can buy or sell shares any time the market's open. Compare that to traditional real estate, where selling a property might take months and cost you thousands in fees. REITs give you the exposure without locking up your money.

Takeaway

REITs convert illiquid property investments into liquid, dividend-paying securities—giving you real estate exposure with the flexibility of stock market investing.

REITs don't always move in lockstep with the broader stock market. Their returns depend on real estate values, rental income, and property-specific factors. This makes them a useful diversification tool. When your tech stocks zig, your real estate holdings might zag—or at least zig less dramatically.

There's another benefit worth considering: inflation protection. When prices rise, landlords typically raise rents. Those higher rents flow through to REIT dividends. Meanwhile, the underlying property values often appreciate during inflationary periods too. Real estate has historically been one of the better asset classes for maintaining purchasing power over time.

A typical allocation might be 5-15% of a diversified portfolio, depending on your goals. You're not replacing stocks or bonds—you're adding a third leg to your investment stool. REITs provide income like bonds but growth potential like stocks, sitting somewhere between the two in terms of risk and return.

Takeaway

REITs add diversification because real estate returns follow different patterns than stocks and bonds, while rental income provides a natural hedge against rising prices.

Here's where REITs get tricky. Those generous dividends? They're usually taxed as ordinary income, not at the lower qualified dividend rate. If you're in a higher tax bracket, this can take a meaningful bite out of your returns. The tax code treats most REIT distributions differently than dividends from regular corporations.

This tax treatment has a practical implication for where you hold REITs. Tax-advantaged accounts—like IRAs, 401(k)s, or Roth accounts—shield you from annual tax hits on those distributions. You won't owe taxes until you withdraw (traditional accounts) or never owe taxes on the growth (Roth accounts).

Holding REITs in a taxable brokerage account isn't wrong, but you'll want to factor in the tax drag when comparing expected returns. Some portion of REIT distributions may qualify as return of capital or capital gains, which receive better tax treatment, but the bulk is typically ordinary income. Account placement matters more for REITs than for most stock investments.

Takeaway

REIT dividends face higher tax rates than typical stock dividends, making tax-advantaged retirement accounts the most efficient place to hold them.

REITs offer something genuinely valuable: real estate exposure without the headaches of direct ownership. You get diversification, inflation protection, and steady income—all through a simple brokerage purchase. The 90% distribution requirement means those rental payments flow to your account, not into retained earnings.

Just remember the basics: understand that you're buying real estate risk, use REITs as one piece of a diversified portfolio, and think carefully about which account type makes sense for the tax treatment. Start small, learn how they behave, and adjust from there.