How Anyone Can Invest in Real Estate: Understanding the Structure of REITs

Many experts recommend devoting about 5–15 percent of your asset allocation to real estate or other alternative investments. Frank Lambert/Shutterstock

If you’ve ever wanted to invest in real estate but don’t have the means to buy and manage physical property, you may be interested in real estate investment trusts (REITs).

A REIT is a company that owns and operates income-generating real estate such as apartment complexes, shopping malls, and warehouses.

Because REITs trade on public exchanges, you can buy shares of a REIT through most brokerage accounts in much the same way you’d purchase a share of a company’s stock.

REITs also pay dividends. In fact, REITs are legally required to distribute at least 90 percent of their taxable income as dividends to shareholders. So you can benefit from positive movements in the REIT’s share price as well as dividends.

Most REITs are known as equity REITs. These entities make their money through rent and leasing as opposed to reselling property. And equity REITs saw some positive performance this year.

Through Nov. 30, 2024, the total return for the FTSE Nareit All Equity REIT Index stood at 14 percent, spiking above the 25-year average of about 10 percent, according to research by Nariet, a representative of the global REIT industry.

Nariet also projects some positive performance in 2025 amid expectations of moderating interest rates and strong economic growth.

But before you invest in REITs, it’s important to do your homework.

How Do REITs Work?

REITs are companies that pool capital from investors to buy large real estate portfolios to generate income from. These portfolios can contain one or many of these types of properties:

• Apartment buildings
• Single-family homes
• Retail centers
• Shopping malls
• Office space
• Hotels
• Medical facilities
• Skyscrapers
• Warehouses
• Data centers
• Cell towers
• Energy pipelines
• Fiber cables

Types of REITs

Some REITs focus on specific sectors such as medical facilities or shopping centers. Some hold diversified portfolios holding different kinds of properties. These can come in the form of REIT mutual funds or REIT ETFs that invest in various types of properties instead of stocks or bonds.

Some investors have access to certain REITs through employer-sponsored retirement plans like 401(k)s and 403(b)s.

There are also mortgage REITs, which make money off interest payments from mortgages or mortgage-backed securities. These are sometimes called mREITs. Moreover, hybrid REITs combine the strategies of equity and mortgage REITs.

On the other hand, private REITs don’t trade on public exchanges, and typically are available only to institutional investors. But even experienced and affluent investors should approach private REITs with caution as their structure can open the door to fraud. You can look up the registration status of REIT issuers using the SEC’s EDGAR database.

Advantages of Investing in REITs

REITs aren’t generally correlated to asset classes like stocks and bonds. That means they don’t tend to move in the same direction. So adding REITs to your portfolio could add another layer of diversification that could protect your investments when other asset classes face downturns.

In addition, many financial experts have seen REITs as inflation hedges.

An analysis found that between the 1970s and the mid-2020s, REIT returns outperformed the stock market during 56 percent of 12-month periods with high inflation, and more than 80 percent for the 12-month periods when inflation was continuing to go up.

But as with any investment, REITs have their risks.

Disadvantages of Investing in REITs

Although many REITs are required to pay dividends to shareholders, the tax treatment of these payments isn’t always favorable. That’s because REITs are generally taxed as ordinary income. The rate can be as high as 37 percent for the highest earners.

Moreover, REIT fees can also eat away at your investment returns. So you need to take a close look at REIT expense ratios or managing costs.

The average expense ratio for a REIT ETF is 0.43 percent, according to research by ETF.com. But fees can be exceptionally higher.

And, by nature, REITs are sensitive to the state of the real estate market. High interest rates can put the housing market in a tailspin. Government lockdowns can deliver a blow to the commercial and corporate real estate sectors. Data centers could come under government scrutiny over energy consumption. All this can have a massive impact on your REITs.

So it’s important to pay close attention to the greater real estate market and the specific sectors your REITs operate in.

How to Invest in REITs

If you’re ready to invest in REITs, you can purchase shares on a public exchange via your brokerage account. Here are some examples of popular REITs today:

• SL Green Realty Corp. (SLG)
• ACRES Commercial Realty Corp. (ACR)
• Vornado Realty Trust (VNO)
• American Tower Corp. (AMT)
• Crown Castle Inc (CCI)
• SBA Communications Corp. (SBAC)

But how much should you invest in REITs? Many financial advisors recommend you start by investing around 2–4 percent in a diversified REIT or REIT fund. As you get used to the REIT market, you can adjust your proportions based on your investment goals, risk tolerance, and other variables. Overall, many experts recommend devoting about 5–15 percent of your asset allocation to real estate or other alternative investments.

For some more tips, check out our guide on how to wrap up your finances strong this year.

The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.