Most people build real estate wealth by buying a home or investing in rental properties, but a third option gets less attention. 

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. Instead of buying an apartment building or shopping center yourself, you can buy REIT shares and participate in the income and potential growth of its properties. 

This gives investors access to large-scale properties that most could never access on their own. So, what are the principles of REITs, and should you invest in them?

Key Takeaways: 

• A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate, allowing investors to buy shares and gain accessible exposure to large-scale properties without direct ownership.
• REITs build wealth through two main channels: consistent dividend income and long-term price appreciation as underlying property values grow.
• They come in several forms, including equity, mortgage, hybrid, and sector-specific REITs, and carry risks such as interest rate vulnerability, sector-specific market trends, potential distribution reductions, and taxation as ordinary income.
• REITs should be considered when they provide specific portfolio benefits like diversification, real estate exposure, liquidity, and income, provided investors carefully evaluate underlying property value, cash flow, debt levels, and management track records. 

How Real Estate Investment Trusts Work 

You invest in a REIT much like you would in a stock, but buying shares gives you a direct stake in the properties and income streams it generates.

REITs can own many types of properties, including apartment buildings, office complexes, shopping centers, warehouses, hotels, healthcare facilities, and even data centers. 

Many generate revenue by collecting rent from tenants, which they use to cover operating costs, debt, and other expenses. 

Public vs. Private REITs 

If you’re asking what REITs are and whether you should invest in them, it’s important to remember that public REITs are also publicly traded securities. 

This makes them much more accessible and liquid than owning physical property, but at the expense of fluctuating share prices. Market turbulence may cause a publicly traded REIT to fall in price even when the value of its underlying properties hasn’t changed by the same amount. 

Private REITs aren’t publicly traded, but they can impose minimum holding periods, early-redemption charges, and withdrawal limits, and redemptions may be suspended altogether. 

Because their valuations rely on periodic appraisals rather than continuously traded market prices, reported returns can appear smoother than the underlying investment risk warrants. 

High commissions and ongoing fees can also erode investor returns, and there have been documented cases of fraud and other misconduct, although fees, valuation practices, and investor protections vary significantly across products.

Should REITs Be in Your Portfolio? 

REITs build wealth through two main sources: income and price appreciation. 

By law, REITs are required to distribute at least 90% of their taxable income to shareholders as dividends. 

As underlying property values appreciate over time, the REIT’s overall value increases, along with your shares’ value. 

The rate of appreciation depends on which REITs are in your portfolio. Nonetheless, this combination of regular dividend income and long-term growth makes a compelling argument when comparing the benefits and risks of investing in REITs. 

REITs vs. Owning Real Estate Directly 

Both investments give you exposure to property, but the experience of owning them can differ greatly. 

REITs	Direct Ownership
Easy to buy and sell if publicly traded	Generally hard to sell quickly
No property management	Owner handles and pays for management
Provides easier exposure to multiple properties	May be concentrated in one or a few properties
Market prices fluctuate constantly if publicly traded	Property values generally appreciate
Professional management	Owner has more control over decisions
Lower involvement	Greater control and involvement

What Are REITs Best For? 

Investing in a publicly traded REIT gives you exposure without the hassle of finding tenants, handling repairs, or managing a property. You can also buy or sell your shares pretty easily. 

On the other hand, direct ownership gives you more control. You choose the property, financing, tenants, and improvements. However, you also take on the work and risks that come with owning a physical property. 

Neither approach is automatically better, so whether REITs belong in your portfolio depends on how much liquidity, control, diversification, and involvement you want. 

How Different Real Estate Investment Trusts Work 

You can also invest in several distinct types of REITs. Understanding which REITs suit your portfolio matters because the type you invest in determines the risk you’re taking on, not just the income. 

• Equity REITs are the most common. They own and operate income-producing properties like apartment buildings, office towers, retail centers, and industrial warehouses. Returns come from rental income and property appreciation. 
• Mortgage REITs work differently. Instead of owning properties, they finance real estate by buying mortgages and mortgage-backed securities. They tend to offer higher yields than equity REITs but also carry higher risk. 
• Hybrid REITs combine both approaches. I.e., they own properties and also mortgage investments. 
• Sector-specific REITs own properties in niches like healthcare, data, self-storage, hospitality, etc. Each one behaves differently depending on what’s happening in that particular industry. 

What Are the Risks of REITs? 

REITs can provide income and real estate exposure, but they aren’t low-risk investments. You need to consider the benefits and risks of investing in REITs together because several factors can affect a REIT’s value and distributions. 

• Interest Rates 

Interest rates are REITs ’ biggest vulnerability. When interest rates rise, borrowing costs increase for the properties they own and operate, which squeezes income. 

Most recently, for example, the U.S. Federal Reserve’s 2022 rate-hiking cycle caused the S&P United States REIT index to drop 27% that year, the steepest decline since the 2008 financial crisis. 

• Sector Risk 

A retail REIT is only as strong as the health of brick-and-mortar retail. An office REIT is directly exposed to remote work trends reshaping how companies use office space. 

Buying a REIT without understanding its sector is like buying a stock without understanding the industry. You should thoroughly research what REIT sector you are investing in. 

• Distribution Reductions 

REITs aren’t guaranteed to maintain their dividends. Lower property income, higher costs, debt obligations, or other financial pressures can reduce distributions. 

• Taxes 

Unlike qualified dividends from most stocks, REIT dividends are generally taxed as ordinary income. Your tax bracket can meaningfully affect your actual after-tax return. 

One way to manage this is to hold your REITs inside a tax-advantaged account like an IRA. Sheltering them from annual taxation can make a big difference in your after-tax returns over time. 

Look Beyond the Dividend Yield 

Another important point is that, like bonds, high dividend yields may also reflect higher risk. The REIT’s share price may be falling, or investors may have concerns about the sustainability of its distributions. 

Consider the following questions before investing: 

• What are the REIT’s underlying properties worth? 
• Do occupancy rates and cash flow justify that valuation? 
• How much debt is the REIT carrying? 
• And how strong is the management track record? 

So, Should REITs Be in Your Portfolio? 

The honest answer is: consider them only if they add something specific and useful to your portfolio, such as diversification, dividend income, passive real estate exposure, long-term appreciation potential, and liquidity. 

At WealthArch Investment Services, we do exactly this kind of evaluation for all our clients, looking at what you already own and whether any addition genuinely improves the overall picture. 

Wondering whether REITs make sense for your portfolio? Schedule a free consultation with our team today.