REITs Explained: How to Invest in Real Estate With Just $100

Types of REITs: Equity, Mortgage, and Hybrid

There are three main types of REITs, each with a different strategy for generating income. Understanding the differences helps you choose the right REIT for your goals.

Equity REITs own and operate income-producing properties. They earn income primarily through rent. These are the most common type of REIT and generally considered the most straightforward. Examples include Realty Income (O), which owns over 12,000 properties and pays monthly dividends, and Prologis (PLD), which owns warehouses and logistics centers. Equity REITs typically provide stable income with moderate growth potential.

Mortgage REITs (mREITs) lend money to real estate owners and operators. They earn income from the interest on mortgages and mortgage-backed securities. mREITs offer higher yields (typically 8% to 12%) but carry more risk because they are sensitive to interest rate changes and credit defaults. Annaly Capital Management (NLY) is one of the largest mortgage REITs. These are better suited for experienced income investors who understand interest rate cycles.

Hybrid REITs combine both strategies, owning properties and lending money. They offer a middle ground between equity and mortgage REITs, providing some diversification within a single REIT. Hybrid REITs are less common but can be a good option if you want exposure to both rental income and lending income. Learn more about real estate investing strategies →

How to Invest in REITs

Investing in REITs is as simple as buying shares of stock. You need a brokerage account — any major broker like Vanguard, Schwab, Fidelity, or Interactive Brokers works. Once your account is funded, you can search for REIT ticker symbols and place a trade. You can buy individual REITs like Realty Income (O), or you can buy a REIT ETF like VNQ (Vanguard Real Estate ETF) for instant diversification across hundreds of properties and dozens of REITs.

The minimum investment depends on the broker. If your broker supports fractional shares (most do), you can invest as little as $10 or $100. If buying full shares, expect to pay $50 to $100 per share for most REITs. REIT ETFs like VNQ trade around $90 per share. Either way, REITs offer a path to real estate investing with far less capital than the 20% down payment required for a physical rental property.

For beginners, starting with a REIT ETF is recommended. VNQ provides exposure to over 150 REITs across all property sectors — retail, residential, office, industrial, healthcare, and data centers. This diversification reduces the risk of any single property market downturn. As you learn more, you can add individual REITs that focus on specific sectors you believe will outperform. Compare the best brokers for REIT investing →

REIT Dividend Yields and Income Potential

REITs are known for their high dividend yields. Because they are legally required to distribute 90% of taxable income, REIT dividends typically range from 3% to 8%, significantly higher than the S&P 500 average yield of 1.5%. Some mortgage REITs yield even higher — 10% to 14% — though with correspondingly higher risk. Dividends are usually paid quarterly, though some REITs like Realty Income (O) pay monthly, making them popular among income-focused investors.

The high dividend yield has a catch: REIT dividends are generally taxed as ordinary income rather than qualified dividends, meaning they are taxed at your marginal income tax rate. This makes REITs more tax-efficient in tax-advantaged accounts like IRAs and 401(k)s. In a taxable account, the higher tax rate on REIT dividends reduces your after-tax income compared to qualified dividends from regular stocks.

Over the long term, REITs have delivered competitive total returns. From 2010 to 2025, the FTSE NAREIT All Equity REITs Index returned approximately 10% annually, comparable to the S&P 500. However, REITs are more volatile and more sensitive to interest rate changes. When interest rates rise, REIT prices tend to fall because higher rates increase borrowing costs and make REIT dividends less attractive relative to bonds. Explore dividend investing strategies →

Risks of REIT Investing

REITs are not risk-free. The most significant risk is interest rate sensitivity. When the Federal Reserve raises interest rates, REIT prices typically decline. This is because higher rates increase the cost of borrowing for REITs (which use debt to acquire properties) and make the yields on bonds (a competing investment) more attractive. In 2022, REITs fell approximately 25% as the Fed aggressively raised rates. For investors with a long time horizon, these rate-driven declines are temporary — REITs have historically recovered once rates stabilize.

Property market downturns also affect REITs. A recession can lead to lower occupancy rates, reduced rent collection, and falling property values. REITs focused on office properties have been particularly challenged as remote work reduces demand for office space. Conversely, REITs focused on data centers, self-storage, and industrial properties have performed well as e-commerce and cloud computing drive demand for logistics and digital infrastructure.

Sector concentration is another risk. Some REITs specialize in a single property type, such as retail malls or hotels. If that sector faces headwinds (e.g., online shopping hurting malls), the REIT's income and share price can suffer significantly. Diversifying across REIT sectors or using a REIT ETF mitigates this risk. Compare REITs to direct rental property investing →

Are REITs safer than physical real estate?

REITs and physical real estate have different risk profiles. REITs offer liquidity — you can sell your shares in seconds during market hours. Physical real estate takes months to sell and involves transaction costs of 5% to 10%. REITs also provide diversification across many properties and markets, while a single rental property concentrates your risk in one building and one neighborhood. However, physical real estate offers control — you can improve the property, raise rents, and force appreciation. It also provides leverage through mortgages (which amplifies returns). Most financial advisors consider publicly traded REITs less risky than a single rental property but more volatile than the broad stock market.

How are REIT dividends taxed?

REIT dividends are typically taxed as ordinary income at your marginal tax rate, not as qualified dividends at the lower capital gains rate. This is because the dividends come from rental income that the REIT does not pay corporate tax on. A portion of REIT dividends may be classified as "return of capital," which is not taxed immediately but reduces your cost basis. This makes REITs more tax-efficient in retirement accounts like IRAs, where ordinary income tax rates apply to withdrawals regardless. Holding REITs in a taxable brokerage account means you pay your full income tax rate on the dividends each year.

What's the best REIT for beginners?

The best REIT for most beginners is VNQ (Vanguard Real Estate ETF). It charges a low 0.12% expense ratio, holds over 150 REITs across all property sectors, and requires no research beyond buying the fund. VNQ provides instant diversification and has returned approximately 9% annually over the long term. If you want a single REIT with a long track record and monthly dividends, Realty Income (O) is an excellent choice — it has increased its dividend for over 100 consecutive quarters and owns a diversified portfolio of commercial properties leased to tenants on long-term contracts.

Can I lose money in REITs?

Yes, you can lose money in REITs, especially in the short term. REIT prices fell approximately 30% in March 2020 during the pandemic downturn and approximately 25% in 2022 when interest rates rose. However, REITs have historically recovered from downturns as property values and rental income rebound. Losses are permanent only if you sell during a downturn. Over 10+ year periods, REITs have generated positive total returns. The key is the same as any investment: invest for the long term, diversify across sectors, and avoid panic selling when prices drop. A REIT ETF like VNQ reduces the risk of permanent loss compared to buying a single REIT.

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