What Is a Real Estate Investment Trust (REIT)?
A REIT is a company structured to own, operate, or finance income-generating real estate, from apartment complexes and shopping centers to cell towers and data centers. Most REITs are publicly traded, so buying a share gives you liquid exposure to a professionally managed property portfolio.
To qualify as a REIT in the U.S., a company must meet strict rules: invest at least 75 percent of assets in real estate, earn at least 75 percent of gross income from real estate sources, and pay out at least 90 percent of taxable income to shareholders as dividends. In exchange, the REIT pays no corporate income tax on distributed earnings.
How REITs Work
Equity REITs, the most common type, collect rent from tenants, pay operating costs and interest, and distribute the bulk of what remains to shareholders. Mortgage REITs instead lend against property or buy mortgage securities, earning the spread between their borrowing costs and mortgage yields.
Because depreciation distorts real estate earnings, analysts evaluate REITs using funds from operations, or FFO, which is roughly net income with depreciation added back and property sale gains removed. Price-to-FFO plays the role for REITs that the P/E ratio plays for regular stocks.
Example
Suppose a REIT generates 2.50 dollars of FFO per share and pays out 2.00 dollars in annual dividends. If the stock trades at 40 dollars, its dividend yield is 2.00 / 40 = 5.0 percent and its payout ratio is 2.00 / 2.50 = 80 percent of FFO, comfortably above the 90 percent taxable income rule since taxable income runs below FFO.
An investor holding 100 shares collects about 200 dollars per year in dividends, though most REIT dividends are taxed as ordinary income rather than at the lower qualified dividend rate.
Why It Matters
REITs turned commercial real estate, once accessible only to institutions and the wealthy, into an asset class anyone can own with intraday liquidity and built-in diversification. Their high, contractual dividend streams make them a staple of income portfolios, though the same trait makes them sensitive to rising interest rates.
Real estate is also its own coverage vertical in investment banking and equity research, where REIT analysts model FFO, cap rates, and net asset value rather than standard earnings, making the sector a distinctive career path within finance.
