How to Invest in REITs: A Step-by-Step Guide

To invest in REITs, open a brokerage account or IRA, choose individual REIT shares, a REIT fund, or a non-traded REIT, place the order, decide whether to reinvest dividends, and keep the Form 1099-DIV you receive after each year. A listed REIT share or REIT exchange-traded fund (ETF) costs the price of one share, or less if your broker sells fractional shares. A REIT mutual fund can require more to open, such as $3,000 for Vanguard Real Estate Index Fund Admiral Shares, and a non-traded REIT such as Blackstone Real Estate Income Trust (BREIT) requires at least $2,500 plus income or net worth minimums.

Step 1: Choose the account

Where you hold REITs decides when you pay tax on the dividends, which are mostly taxed as ordinary income rather than at the lower rates that apply to most other corporate dividends.

Your IRA contributions also cannot exceed your taxable compensation for the year, which is pay for work, such as wages or self-employment income. Rental income, interest, and dividends do not count, though on a joint return one spouse's pay can cover contributions for both. If you want REITs in a 401(k), check whether your plan's fund menu includes a real estate fund.

Step 2: Choose individual REITs, a REIT fund, or a non-traded REIT

• Individual REIT shares. You pick the companies and property sectors, and each listed REIT's annual and quarterly reports are free on the SEC's EDGAR database. FFO and AFFO explained covers the earnings measures REITs report and how to check whether a dividend is covered.
• A REIT ETF or mutual fund. One purchase buys a basket of REITs. Vanguard Real Estate Index Fund Admiral Shares, for example, tracks an index of U.S. real estate stocks that includes REITs and real estate management and development companies, and its yearly expenses are 0.13%, or about $13 on a $10,000 balance. REIT ETFs and mutual funds compares the main funds' costs and holdings.
• A public non-traded REIT. These are registered with the SEC but not listed on an exchange, so you buy through a broker or adviser taking part in the offering. The SEC says sales commissions and upfront fees on non-traded REITs usually total about 9% to 10% of the purchase. BREIT's Class T-2 and S-2 shares charge up to 3.5% upfront plus a stockholder servicing fee of 0.85% a year. BREIT also pays its adviser a management fee of 1.25% of net asset value a year and a performance allocation of up to 12.5% of total return in years that return exceeds 5%. To sell, you ask the REIT to buy your shares back: BREIT limits repurchases to 2% of its net asset value a month and 5% a quarter, can buy back fewer shares than requested or none, and generally pays 98% of the current share price for shares held less than a year. Publicly traded vs non-traded REITs compares the costs and exit rules in more detail.

How much money does each route take?

Private REITs are a separate route with their own minimums and buyer rules, and the comparison of publicly traded and non-traded REITs linked above covers who can buy them. To weigh these amounts against buying property directly, see how much money you need to start in real estate.

Step 3: Place the order

For listed REIT shares and ETFs:

1. Move money into the account and wait until it shows as available to trade.
2. Look up the REIT or fund by its ticker symbol.
3. Enter a number of shares, or a dollar amount if your broker allows fractional purchases.
4. Choose the order type. A market order placed while the market is open generally fills right away but does not guarantee the price, and the last-traded price you saw may not be the price you get. A limit order fills only at the price you set or better, so it may not fill at all.
5. Review and submit.

Mutual funds and non-traded REITs are priced differently. A mutual fund order buys at the fund's next calculated net asset value (NAV) per share, the value of its holdings minus its liabilities, plus any purchase fees, and Vanguard takes direct orders online, by mail, or by phone. A BREIT purchase goes through a subscription agreement, the signed purchase application, submitted by a participating broker or adviser. BREIT accepts purchases as of the first day of each month at the prior month's share price plus any upfront fees, and your subscription must be received in good order at least five business days before that date.

Step 4: Decide whether to reinvest dividends

Dividend reinvestment uses each dividend to buy more shares of the same REIT or fund instead of paying you cash. Most mutual funds let you choose it, some REITs run their own reinvestment plans, and for listed shares and ETFs you can check whether your broker offers automatic reinvestment. In a taxable account, reinvested dividends are taxed in the year paid just as if you had taken cash. Keep a record of each reinvestment's date and amount: each one is a purchase that adds to your cost basis (what you paid for the shares, for tax purposes), which lowers your taxable gain when you sell.

Step 5: Keep your Form 1099-DIV

For a taxable account, the REIT or your broker sends Form 1099-DIV after each year in which you receive $10 or more in dividends and other distributions. The boxes that matter most for REITs:

• Box 1a, total ordinary dividends, usually most of a REIT payout and taxed at your regular rate, except any part also shown in box 1b as qualified dividends, which can get the lower capital gains rates.
• Box 5, section 199A dividends, your qualified REIT dividends. If you owned the shares for more than 45 days during the 91 days that start 45 days before the ex-dividend date (the first day a buyer no longer gets the declared dividend), you can generally deduct 20% of this amount on Form 8995 or 8995-A, subject to an overall cap based on your taxable income.
• Box 2a, capital gain distributions, reported as long-term capital gains regardless of how long you have held the shares; any part also shown in box 2b, gain from depreciation on real estate the REIT sold, is taxed at up to 25%.
• Box 3, nondividend distributions, a return of capital that is not taxed now. Subtract it from your cost basis; once basis reaches zero, report further amounts as capital gains.

A dividend a REIT declares in October, November, or December, payable to shareholders of record in that month, and pays the following January counts as received on December 31, so it belongs on the earlier year's return. REIT tax treatment explains how each part is taxed, and what REITs are and how they work explains why REITs pay out most of their income.