REIT Investing 101 [What To Know First]

If you want to get exposure to commercial real estate but don’t want to deal with the headaches of finding and managing physical assets, investing in publicly traded REITs is something worth considering.

But while these can be great ways to invest passively in commercial real estate, there are some major downsides of going this route that you need to be aware of.

So in this post, we’ll walk through what REITs are, and the biggest pros and cons to look out for when making these investments.

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What Is a REIT?

To start by defining what a REIT is, the term REIT stands for Real Estate Investment Trust, which is a company that owns, operates, or finances income-producing real estate.

For the purposes of this post, we’re going to be talking about publicly-traded REITs (which are registered with the SEC and trade on national stock exchanges), since these are by far the most accessible to the vast majority of investors.

To be classified as a REIT, a company must have at least 100 shareholders, with no more than 5 individuals owning more than 50% of the value of the stock.

The entity also needs to have at least 75% of its assets directly tied to real estate (including property ownership or loans secured by real property), and the company has to distribute at least 90% of its taxable income to shareholders each year.

Pro #1: REIT Distributions

The first major benefit of investing in REITs is that these are designed with a primary focus on regular distributions.

According to the National Association of Real Estate Investment Trusts (NAREIT), the average dividend yield for FTSE-listed REITs in July of 2025 was 4.38%, which was more than 3.5 times the dividend yield of the S&P 500.

This number also stayed relatively steady from 2020 to 2025, with dividend yields coming in at over 3.8% in each year during this timeframe. This was the case even when interest rates rose at record-high levels, and many private investors were seeing major drops in cash flow.

Pro #2: Liquidity

The second big advantage of investing in REITs is something that’s extremely rare in most real estate investment vehicles, and this is liquidity and the ability to sell quickly.

When you own a property outright, it can take months or even years to exit that investment, and it’s often a time-consuming and energy-intensive process to get a property ready for sale.

But when you own publicly-traded REIT stock, exiting an investment is as simple as logging into your brokerage account and hitting the “sell” button, which is a lot more convenient when you need cash quickly.

This also makes it really easy to rebalance a portfolio if your financial circumstances change, or if you just want to change your asset allocation.

Some people think of this as a con, since it is easier to panic sell when the market’s down. However, if you don’t consider yourself an emotional investor and you’re willing to ride out the inevitable fluctuations of the market, this is a major benefit that’s worth thinking about.

Pro #3: Easy Diversification

On top of liquidity and income generation, another big benefit of investing in REIT stock is that this allows you to diversify your real estate portfolio in a way that would be extremely difficult to do as an individual investor.

By investing in a single property on your own or investing in a real estate syndication, you have to put up tens or hundreds of thousands of dollars into a single asset. This makes that investment highly dependent on the performance of one specific property in one specific city.

However, by investing in a single REIT stock with as little as a few thousand dollars, this could easily give you exposure to hundreds or even thousands of different real estate deals across multiple geographic markets.

Many REITs focus on only one or two core asset classes, so each stock does usually have some concentration risk, but by buying stock in multiple different REITs (or a REIT index fund that tracks the market), you can diversify a lot and reduce your risk.

Pro #4: Conservative Leverage

If you consider yourself to be risk-averse, REITs also tend to use very conservative leverage levels. As of Q1 of 2025, the average debt ratio for publicly traded REITs came in at just over 32%, and the average coverage ratio on that debt service was over 4.0x.

And when you compare that to many privately held real estate investments with 65-75% leverage and debt service coverage ratios falling between 1.3x and 1.5x, REIT investing can be a great way to reduce risk and minimize your downside.

Con #1: Tax Treatment

Even though REITs do have their advantages, there are also some major downsides that could negatively impact investment returns.

And the first thing to be aware of is that the tax treatment of dividends distributed by REITs is typically very unfavorable to investors, especially high income earners.

Rather than generating qualified dividends (which are taxed at capital gains tax rates), REIT dividends are typically classified as non-qualified, meaning that these dividends are often taxed at ordinary income tax rates.

And if you’re already in a high tax bracket, this can be a major drag on your returns. This is especially relevant when comparing REIT dividends to the income you might receive from direct ownership in a property, where taxes on distributions are often shielded almost entirely by depreciation.

Many REITs do benefit from the qualified business income deduction, which reduces taxable income on these dividends by 20%, but the less-than-favorable tax treatment of REIT investments is something to consider if you’re trying to maximize the cash flow you can generate from your real estate.

Con #2: Overhead Costs

The second major downside to consider when investing in REIT stock is that you’re investing in an entire company, which can come with significant overhead costs that you have to pay for.

When you buy REIT stock, not only are you buying a share of the portfolio of properties the company owns, but you’re also buying a share of the company itself. This means that things like office costs, salaries and bonuses, and regulatory compliance costs will all ultimately eat into your returns.

This can make buying REIT shares a lot less efficient than investing in a syndication (where you’re investing in a separate entity that has a sole purpose to hold a real estate asset), and you’re not paying for things like HR costs or office expenses that come along with REIT ownership.

There are also benefits to this, since bigger companies do usually have a lower cost of capital and more economies of scale when operating their portfolios. However, this is definitely something to consider if you’re able and willing to invest in real estate outside of a REIT structure.

Con #3: Market Volatility

The last big downside worth mentioning about REITs is that the valuations of these companies are heavily reliant on the whims of the public markets.

Unlike privately held real estate that’s really only priced when a property is appraised or listed for sale, REIT stock prices can change significantly on a daily basis due to factors completely unrelated to the value of a company’s portfolio.

This means that if you consider yourself an emotional investor and find yourself hitting the “sell” button as soon as the market dips, direct investing might be a much better fit for you, since you won’t see fluctuations in the value of your property on a day-to-day basis.

How To Learn More About Real Estate Investment Analysis

If you want to learn more about the investment analysis process that both REITs and real estate private equity firms use to value commercial properties, or you want to build the technical skills you’ll need to land a job in the real estate industry, make sure to check out our all-in-one membership training platform, Break Into CRE Academy.

A membership to the Academy will give you instant access to over 120 hours of video training on real estate financial modeling and analysis, you’ll get access to hundreds of practice Excel interview exam questions, sample acquisition case studies, and you’ll also get access to the Break Into CRE Analyst Certification Exam, which covers topics like real estate pro forma and development modeling, commercial real estate lease modeling, equity waterfall modeling, and many other real estate financial analysis concepts that will help you prove to employers that you have what it takes to tackle the responsibilities of an analyst or associate at a top real estate firm.