TL;DR

• A REIT is a company that owns, operates, or finances income-producing real estate and must distribute at least 90% of taxable income to shareholders annually, shifting tax liability to the individual.
• Equity REITs earn rent from owned properties, mortgage REITs earn interest spreads on mortgages and MBS, and PNLRs offer SEC-registered but non-exchange-traded access with lower minimums.
• You can invest by buying shares on a stock exchange, through REIT funds and [ETFs](/blog/reit-etfs), or via direct purchase of non-traded shares — but verify registration on the SEC's EDGAR system first.

What Is a REIT?

A REIT is a company that owns, operates, or finances income-producing real estate [1]. Congress established REITs in 1960 so individual investors could gain exposure to large-scale income-producing real estate without purchasing property directly [7]. The structure lets ordinary investors participate in commercial real estate — malls, apartments, offices, warehouses, and timberland — through a publicly traded security.

Public REITs are registered with the SEC and trade on national stock exchanges [1]. Private REITs are exempt from SEC registration, and their shares do not trade on public exchanges [5]. Public non-listed REITs, also called PNLRs, occupy a middle ground: they are registered with the SEC but do not trade on national stock exchanges [4].

How Does a REIT Work?

A REIT operates by pooling investor capital to acquire, manage, or finance real estate assets, then passing through at least 90% of taxable income as dividends [1]. The mechanism is a tax trade-off: the REIT avoids corporate income tax by distributing substantially all taxable income, and in return shareholders owe tax on those distributions at ordinary income rates [1][6]. Equity REITs collect rent from properties they own for the long term [1]. Mortgage REITs hold mortgages and mortgage-backed securities and earn profit from the net interest margin — the spread between interest income on mortgage assets and their funding costs [3].

What Are the Different Types of REITs?

There are three primary categories, each with a distinct income source and risk profile.

Sources: [1] https://www.reit.com/what-reit, [2] https://www.reit.com/what-reit/types-reits/guide-equity-reits, [4] https://www.reit.com/what-reit/types-reits/guide-public-non-listed-reits-pnlrs, [5] https://www.reit.com/what-reit/types-reits/guide-private-reits

Equity REITs generate income through the collection of rent on, and from sales of, the properties they own for the long-term [1]. They are the most common type and offer investors exposure to property value appreciation alongside dividend income.

Mortgage REITs (mREITs) invest in mortgages or mortgage securities tied to commercial and/or residential properties [1]. Rather than collecting rent, an mREIT earns from the spread between interest income on its mortgage and MBS holdings and its cost of capital [3]. Because income depends on interest rates and credit quality, mREITs are more volatile than equity REITs.

Public Non-Listed REITs (PNLRs) are SEC-registered but do not trade on national stock exchanges [4]. They typically require a $1,000–$2,500 initial investment and may charge up-front commissions or trail fees that vary by company [4].

What Are the SEC Requirements for a REIT?

To qualify as a REIT under internal revenue rules, a company must satisfy several structural tests [2]:

1. Corporate form — organized as a corporation, trust, or association [2].
2. Board of directors — managed by a board of directors or trustees [2].
3. Shareholder base — at least 100 shareholders [2].
4. Concentration limit — no five or fewer individuals can own more than 50% of the stock [2].
5. Asset test — at least 75% of assets must be real estate assets, cash, or government securities [2].
6. Income test — at least 75% of gross income must come from rents, mortgage interest on real property, or gains from the sale of real estate [2].
7. Distribution test — must distribute at least 90% of taxable income to shareholders each year [2].

Listed REITs are registered and regulated by the SEC, ensuring adherence to standards of corporate governance, financial reporting, and information disclosure [2]. PNLRs must make regular financial disclosures, including quarterly unaudited and annual audited results (10-Q, 10-K, 8-K, and proxy statements) [4]. Private REITs are exempt from SEC registration and related disclosure requirements under Regulation D [5].

How to Invest in REITs

An individual may buy shares in a REIT listed on major stock exchanges just like any other public stock, or purchase shares in a REIT mutual fund or ETF [1]. The [mREIT risks and returns](/blog/mreits-risks) and [equity REIT investing](/blog/equity-reit-investing) pages cover these vehicles in more detail.

1. Direct stock purchase — open a brokerage account, search for the REIT ticker, and buy shares the same way you would purchase stock
2. REIT mutual funds and ETFs — Multiple REIT holdings in one investment product; they have low minimums and provide diversification. Popular options include: ProShares Realty Investors (REZ), Vanguard Real Estate ETF (VNQ), and iShares Cohen & Steers REIT ETF (ICOR). These vehicles combine REIT exposure with liquidity comparable to stocks; they are ideal for passive investors seeking broad real estate market exposure without managing individual positions or handling daily due diligence.
3. Non-traded REITs — You buy directly through the company; shares are not listed on exchanges; liquidity depends on redemption programs that may be limited or non-existent. Use the SEC's EDGAR system to verify registration. Search by the REIT's name or ticker symbol and click the EDGAR search tab. You can filter by form type: S-11 (non-traded REIT) or the fund's CIK number. Before investing, compare the .*\d+ field on the fund's regulatory filings to the name on the prospectus; mismatched CIKs indicate different entities.
4. REIT specialist platforms — Some brokerages offer a limited selection of REITs chosen by specialists; they often include private REITs available through regulated broker-dealers. Access platforms through Interactive Brokers or Charles Schwab REIT specialists and verify if the firm is cleared to sell private REITs by asking for evidence of Series 7/66 licensing and FINRA membership.

Common Errors and Fixes

FAQ

What is a REIT and how does it work?

A REIT is a company that owns, operates, or finances income-producing real estate [1]. It works by pooling investor capital to acquire properties and collecting rental income, which the REIT then distributes to shareholders as dividends [1]. The structure allows investors to benefit from real estate ownership without managing properties and must pass through at least 90% of taxable income to investors.

What are the different types of REITs?

There are three types: public REITs trade on major stock exchanges, public non-listed REITs (PNLRs) are SEC-registered but do not trade on exchanges, and private REITs are exempt from SEC registration and their shares are generally illiquid [4][5]. Equity REITs earn from rent and property sales, mortgage REITs earn interest spreads on mortgage assets, and hybrid REITs combine both approaches.

How do you buy REITs as an individual investor?

You can purchase REIT shares directly on stock exchanges through a brokerage account, invest in REIT mutual funds or ETFs that hold one or more REIT stocks, or buy shares in private REITs if you meet the minimum investment requirements and use a registered broker-dealer [1]. For non-traded REITs, you must use a licensed broker and verify SEC registration on the EDGAR system.

Why are REIT dividends taxed as ordinary income?

REIT dividends are treated as ordinary income rather than qualified dividends because they come from a pass-through structure. The REIT itself avoids corporate-level taxation by distributing income, so investors pay tax on the full amount at their regular tax rate [6]. This is different from qualified dividends, which receive reduced tax rates after the corporation has already paid corporate tax.

What are the risks of non-traded REITs?

Non-traded REITs have no liquid market, so if you need to sell quickly, you may not be able to do so except through limited redemption programs that may charge fees or delay redemption [4]. Additionally, shares may be sold below offering price, offering costs are typically 9–10% of investment, and distributions may be funded by offering proceeds rather than actual profits, which can reduce long-term value [1]. Low minimum investments can create a false sense of accessibility while hiding the underlying liquidity problems.

What is the difference between an equity REIT and a mortgage REIT?

Equity REITs own and operate income-producing properties, deriving returns from rent and property appreciation [1]. Mortgage REITs lend money on real estate through mortgages or mortgage-backed securities, earning from the interest spread between loan yields and borrowing costs [3]. Equity REITs are generally more stable, while mortgage REITs are more sensitive to interest rate changes and credit risk.

Sources