Pros and Cons of Investing in REITs - Experian (2024)

In this article:

  • What Is a Real Estate Investment Trust?
  • Pros of REITs
  • Cons of REITs

Real estate investment trusts (REITs) have been around since 1960, but they've become increasingly popular in the past 25 years as a way for more investors to access the real estate market.

REITs can be a great way to diversify your investment portfolio beyond the stock market, but before you invest, it's important to understand both the benefits and drawbacks REITs present. Here's what you need to know.

What Is a Real Estate Investment Trust?

A real estate investment trust is a company that invests in a variety of income-producing properties, both residential and commercial. Interested investors can invest in medical offices, gas stations, movie theaters, storage facilities, farmland, casinos and many more types of properties.

REITs receive income from the properties they own and then distribute at least 90% of it to their shareholders. That said, many REITs pay out all of their earnings due to the tax benefits.

Because many REITs are listed on major stock exchanges, investors can also generate a return on the share price. Some REITs are public but not listed on an exchange, however, while others are private and inaccessible to the general public.

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Pros of REITs

Investing in REITs can come with a lot of benefits, especially as a companion to other types of investments.

Portfolio Diversification

Asset allocation involves investing in a good mix of asset classes, such as stocks, bonds, real estate and cash.

By investing in REITs, along with other types of investment securities, you can mitigate some of the risks associated with each type of asset. For example, the stock market tends to be more volatile in the short term than the real estate market, allowing you to have a mixture of more and less risky investments.

Additionally, REITs give real estate investors an opportunity to diversify their real estate holdings—something that's tough to do when you're buying individual investment properties, which requires a large amount of cash.


Investors who are interested in the real estate market don't have to save up tens of thousands of dollars for a sizable down payment on an investment property or make regular mortgage payments with REITs.

Depending on which broker you choose, you may even be able to buy fractional shares of a REIT if you can't afford a full share.

Passive Income

As a REIT shareholder, you'll receive regular dividends—monthly, quarterly or annually—based on your holding in the company. If you're in or nearing retirement, or you simply want to build a passive income stream, REITs can be a great way to receive regular income without doing anything.


Unlike traditional real estate investments, REITs allow you to buy and sell shares by simply logging in to your brokerage account and making a trade. If you want to sell an investment property, on the other hand, it can take several months and a large amount of cash to make it happen. This liquidity gives you more flexibility in your investments, allowing you to access cash if you need to.

Competitive Returns

In addition to regular income payments, REIT investors can also take advantage of price appreciation for their shares. Like stock prices, REIT prices can fluctuate over time.

That said, a significant number of REITs outperform the stock market in terms of annualized returns, especially when you hold your position for 10 or more years.

Cons of REITs

While there are some clear benefits to investing in REITs, there are also some disadvantages to consider, especially if you don't diversify your portfolio well.

Dividend Taxes

REIT dividends can be a great source of passive income, but the money you receive is subject to your ordinary income tax rate, which will depend on your tax bracket. And because dividends are paid out regularly, you'll have to pay taxes on the income each year, even if you reinvest your dividends.

In contrast, when you sell a stock after holding it for longer than a year, any gains you receive will be subject to the long-term capital gains tax rate, which is lower than your ordinary income tax rate. In other words, expect a higher and more consistent tax bill with a REIT.

Interest Rate Risk

The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.

Market Volatility

The fundamentals of the real estate market aren't all the same as the stock market, so you generally won't get as much short-term volatility with a REIT as you would with a stock.

That said, the real estate market is still subject to a variety of influences, some of which don't affect the stock market. As such, you'll still experience market volatility with a REIT, which could impact you in the short term.

You Have Little Control

Just as if you were to buy a mutual fund or exchange-traded fund, you don't have any say in how a REIT invests its money, and you have no control at all over the properties themselves.

As a result, some REITs are less diversified than others, focusing on a specific niche, such as office buildings or apartment complexes. If you don't pick a well-diversified REIT or invest in multiple REITs, you may not be as diversified as you think.

Some Charge High Fees

Publicly traded REITs typically don't have a lot of fees beyond trading commissions, which many online brokers don't charge anymore.

But if you decide to invest in a non-listed REIT or a private REIT, upfront costs can be as high as 11% or more of your investment. Private REITs may also charge a 2% management fee each year.

Navigating REIT Investing

Investing in REITs can add some diversification to your portfolio and give you access to passive income, liquidity and excellent long-term returns. However, taxes can be more expensive with REITs compared to other investment options, and there are still risks involved with the real estate market.

If you're looking to add REITs to your portfolio, spend time researching several options. Look at past performance, dividend yields and property holdings to get an idea of what you're getting. You may also consider consulting with a financial advisor to get some personalized expert advice and guidance for your situation and personal finance goals.

Pros and Cons of Investing in REITs - Experian (2024)


What are the pros and cons of buying a REIT? ›

Real estate investment trusts reduce the barrier to entry for investors in the real estate market and provide liquidity, regular income and other perks. However, you'll be exposed to risks that aren't inherent in the stock market and dividends are subject to ordinary income tax.

What I wish I knew before buying REITs? ›

A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.

What is one advantage of investing in a REIT? ›

REITs typically pay higher dividends than common equities. REITs are able to generate higher yields due in part to the favorable tax structure. These trusts own cash-generating real estate properties. REITs are typically listed on a national exchange and provide investors considerable liquidity.

Are REITs a good investment in 2024? ›

April 2, 2024, at 2:50 p.m. Real estate investment trusts, or REITs, are a great way to invest in the real estate sector while diversifying your options. Real estate investments can be an excellent way to earn returns, generate cash flow, hedge against inflation and diversify an investment portfolio.

What are the cons to REIT? ›

Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.

What is a disadvantage of a REIT? ›

Key Takeaways

One risk of non-traded REITs (those that aren't publicly traded on an exchange) is that it can be difficult for investors to research them. Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them.

Why not to invest in REITs? ›

In most cases, REITs utilize a combination of debt and equity to purchase a property. As such, they are more sensitive than other asset classes to changes in interest rates., particularly those that use variable rate debt. When interest rates rise, REITs share prices can be prone to volatility.

Are REITs a good investment now? ›

Many REITs have excellent track records of steadily increasing their dividends. For example, Federal Realty Investment Trust delivered its 53rd consecutive annual dividend increase in 2021, the longest in the REIT industry.

What is the best time to buy REITs? ›

REITs historically rebound when interest rates pivot and have the potential for rent growth. Realty Income, Agree Realty, VICI Properties, Essential Properties Trust, and American Tower are strong picks for long-term growth and income.

Are REITs tax free in the US? ›

Overview. A REIT is taxable as a regular corporation, but is entitled to the dividends paid deduction.

How much should I invest in REITs? ›

According to the National Association of Real Estate Investment Trusts (Nareit), non-traded REITs typically require a minimum investment of $1,000 to $2,500.

What are the fees for REITs? ›

Non-traded REITs are typically sold by a broker or financial adviser. Non-traded REITs generally have high up-front fees. Sales commissions and upfront offering fees usually total approximately 9 to 10 percent of the investment. These costs lower the value of the investment by a significant amount.

How often do REITs go out of business? ›

Bankruptcies are extremely rare in the REIT sector. After all, REITs are required to keep the bulk of their assets in physical properties, or debt backed by real estate. Most real estate tends to appreciate over time, and as long as it holds its value, a REIT can sell properties to pay down debt in a pinch.

Can REITs lose value? ›

Because REITs use debt to purchase investments, rising interest rates could mean these companies would have to pay more interest on future loans. This could in turn reduce their return on investment. Because of this, REITs could potentially lose value when interest rates rise.

Do REITs pay monthly? ›

For investors seeking a steady stream of monthly income, real estate investment trusts (REITs) that pay dividends on a monthly basis emerge as a compelling financial strategy. In this article, we unravel two REITs that pay monthly dividends and have yields up to 8%.

Are REITs as good as owning property? ›

REITs provide a much simpler way to invest in real estate and earn consistent income through dividends, but they confer less control, and their upside tends to be lower than that of rental properties.

Is it better to buy property or REITs? ›

Key Takeaways. REITs allow individual investors to make money on real estate without having to own or manage physical properties. Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making.

Is a REIT better than owning property? ›

REITs can be a good choice because: Buying and selling REIT shares is easier than it is with a physical property. They obviate the need for market-specific knowledge and property management while making it easier to diversify your real estate portfolio.

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