REIT (Real Estate Investment Trust)

A REIT owns or finances income-producing real estate — apartment blocks, warehouses, shopping centers, hospitals, data centers, cell towers — and sells shares in the resulting portfolio. To keep its REIT tax status it must distribute at least 90% of taxable income to shareholders, which is why yields are high: the payout is a legal requirement rather than a management choice.

For an individual investor the appeal is access. Buying a REIT takes a brokerage account and the price of one share, with no down payment, no mortgage, no tenants, and the ability to sell on any trading day — the inverse of direct property ownership on every dimension that usually makes real estate hard.

Sector matters more than the label. Warehouse REITs, office REITs, and residential REITs respond to entirely different economic forces and have diverged sharply, so a single REIT is a bet on one slice of the property market rather than on real estate as a whole.

The tax treatment is the main catch. Most REIT distributions are non-qualified and taxed as ordinary income at your marginal rate rather than at long-term capital gains rates, which makes a tax-advantaged account their natural home.

They diversify a portfolio less than is often claimed. REITs correlate more closely with stocks than with physical property values, they are sensitive to interest rates on both borrowing costs and valuations, and a broad total-market index fund already holds them in proportion to their market weight.