Real Estate Funds (REITs): How to Get Real Estate Exposure Without Buying Property

• by Katie Crawford
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Want to own part of shopping malls, data centers, or apartment buildings without dealing with tenants, repairs, or down payments? That’s what REITs do. Real Estate Investment Trusts let you invest in real estate like you would in stocks-buy shares, get paid rent, and walk away. No lawn mowing. No leaky roofs. Just dividends and potential growth.

What Exactly Is a REIT?

A REIT is a company that owns or finances income-producing property. Think office towers, warehouses, apartment complexes, hospitals, or even cell phone towers. Instead of buying one building yourself, you buy a share of a company that owns hundreds. The U.S. government created REITs in 1960 so regular people could access commercial real estate without needing millions.

To qualify as a REIT, a company must follow strict rules:

• At least 75% of its assets must be in real estate
• At least 75% of its income must come from rent or mortgage interest
• It must pay out at least 90% of its taxable income as dividends to shareholders

Because they pay out so much of their income, REITs usually don’t pay corporate taxes. That means more money flows straight to you-in the form of dividends. That’s why REITs are known for steady income, not wild growth.

Two Main Types of REITs: Equity vs. Mortgage

Not all REITs are the same. There are two big categories:

• Equity REITs (90% of the market): These own and operate physical properties. They make money from rent. Examples: Apartment Building REITs (AVB), Industrial REITs (PLD), Data Center REITs (DLR).
• Mortgage REITs (mREITs): These don’t own buildings. They lend money to real estate owners or buy mortgage-backed securities. They make money from interest payments. Examples: Annaly Capital (NLY), Starwood Property Trust (STWD).

Equity REITs are the safer, more common choice for most investors. Mortgage REITs are more sensitive to interest rate changes. When rates rise, their borrowing costs go up-and their profits can shrink fast.

How REITs Compare to Buying Property Directly

Buying a rental house sounds simple. But here’s what you actually deal with:

• $50,000-$100,000 down payment
• Property taxes, insurance, repairs
• Screening tenants, handling complaints, evictions
• Selling takes months, and you pay 6% in commissions

Now compare that to a REIT:

• Buy one share for $50
• Get paid rent every quarter
• Sell anytime during market hours
• Own pieces of 50+ buildings across the country

REITs give you instant diversification. Simon Property Group, for example, owns over 200 shopping centers in 37 states. You can’t do that with one house.

But REITs aren’t perfect. You don’t control the properties. If the management makes bad decisions, you’re stuck. And you pay fees-usually 0.45% to 1.5% per year if you invest through an ETF or mutual fund.

Where REITs Shine: Income and Diversification

In 2023, the average REIT yielded 3.87%. The S&P 500? Just 1.51%. That’s more than double the income. For retirees or anyone needing regular cash flow, that matters.

REITs also help reduce portfolio risk. Over the last 20 years, REITs moved independently of the stock market. Their correlation with the S&P 500 was only 0.37. That means when stocks drop, REITs often hold steady-or even rise.

Morningstar found that adding 5-10% REITs to a portfolio improved risk-adjusted returns by 1.2% per year. That’s not flashy, but over 10 years, it adds up to tens of thousands in extra growth.

The Dark Side: Dividend Cuts and Market Risks

REITs aren’t immune to trouble. During the pandemic, mall REITs got crushed. Foot traffic vanished. Rents dropped. Some companies cut dividends by 60-90%.

Take Macerich (MAC). In 2023, it slashed its dividend from $1.32 to $0.45 per share. Investors who counted on that income for retirement got blindsided.

Why? Because some REITs paid out more than they earned. A payout ratio above 80% of Funds From Operations (FFO) is risky. CBL & Associates paid out 105% of FFO before collapsing in 2022.

Mortgage REITs face another risk: interest rates. When the Fed hikes rates, mREITs borrow more expensively. Their spreads shrink. Annaly Capital, for example, increased its interest rate hedges from 45% to 78% between 2022 and 2023 just to survive.

And don’t ignore non-traded REITs. These aren’t listed on exchanges. They promise high yields but lock your money in for years. The IMF warned in 2023 that $153 billion in non-traded REITs could cause liquidity crises if investors panic and try to cash out at once.

Top REIT Sectors to Watch in 2025

Not all real estate is equal. Some sectors are booming. Others are struggling.

• Industrial & Logistics (13.9% of REIT market): Warehouses near cities. E-commerce keeps growing. Prologis and Duke Realty are leaders.
• Data Centers (2.9% but growing fast): AI needs servers. Digital Realty and Equinix are riding the wave. Expect 12-15% annual growth through 2027.
• Residential (14.2%): Apartment REITs like AvalonBay (AVB) raise rents 5% a year. Demand stays strong in cities.
• Healthcare (12.3%): Senior housing and medical offices. Aging population = steady demand.
• Office (11.3%): Struggling. Vacancy rates hit 19.6% in late 2023. Many leases expire between 2024-2026. Avoid unless it’s a top-tier building in a strong city.
• Retail (13.7%): Mixed bag. Strip malls with grocery anchors are fine. Big malls? Not so much.

How to Invest in REITs

You don’t need to pick individual REITs. Most people do better with funds:

• REIT ETFs: Low cost, diversified. Examples: VNQ (Vanguard REIT ETF), IYR (iShares U.S. Real Estate ETF). Expense ratios: 0.12%-0.45%.
• Individual REITs: Only if you’ve done your homework. Look for low debt, strong occupancy, and FFO payout ratios under 80%.
• REIT mutual funds: Higher fees (0.8%-1.25%), but some offer active management.

To buy, just open a brokerage account (Fidelity, Charles Schwab, Robinhood). Search for the ticker symbol. Buy like you would Apple or Tesla.

What to Watch: FFO, AFFO, and NAV

Forget earnings per share. REITs use different metrics:

• FFO (Funds From Operations) = Net income + depreciation + amortization - gains from property sales. This shows real cash flow.
• AFFO (Adjusted FFO) = FFO - recurring maintenance costs. Better measure of sustainable income.
• NAV (Net Asset Value) = Estimated value of all properties minus debt. Compare NAV to share price. If the stock trades below NAV, it might be undervalued.

A REIT trading at $50 with an AFFO of $4 per share and a 3.5% yield? That’s a good starting point. If AFFO is rising and the payout ratio is under 75%, you’re looking at a healthy one.

Real Investor Stories

Reddit user u/DividendSeeker2022 holds Realty Income (O). Since 1997, it’s raised dividends 104 times. “I’ve lived through three recessions,” they wrote. “I don’t worry about the stock price. I get paid every month.”

Another user, u/ApartmentREITs, said: “AVB raised rents 5% a year for five years. My AFFO grew 28%. I never had to fix a toilet.”

But not everyone wins. On Seeking Alpha, one investor wrote: “MAC’s dividend cut destroyed my retirement plan.” They held for seven years. Then it vanished.

Should You Invest in REITs?

Yes-if you want:

• Passive income without managing property
• Diversification beyond stocks and bonds
• Liquidity (sell anytime)
• Exposure to real estate without $100K down

No-if you:

• Want to control your assets
• Believe real estate always goes up
• Can’t handle dividend cuts
• Want to avoid taxes on dividends (they’re taxed as ordinary income)

REITs aren’t magic. But for most people, they’re the smartest way to get real estate exposure without the headaches.