Are REITs a Good Investment? Pros and Cons

I have been thinking this week about how quickly the word “income” can end a discussion. A REIT pays a visible yield, and that can make the decision appear finished before the useful questions have even begun: What is the price? How rate-sensitive is the business? Is the income durable? Where does the holding belong in the rest of the portfolio?

REITs—Real Estate Investment Trusts—are a popular way to gain real-estate exposure without buying, financing, or managing a building directly. Whether they are a good investment depends on an investor’s goals, risk tolerance, time horizon, and account type. There is no universal answer.

The case for them is real: REITs can provide above-average income because they must distribute at least 90% of taxable income, publicly traded REITs can be liquid, real estate can diversify a portfolio, management is professional, and public shares can be bought with a low minimum. The costs are real too: interest-rate sensitivity, traded-price volatility, dividends that are mostly ordinary income, sector and market risk, and—among non-traded REITs—limited liquidity and historically higher fees.

First-order thinking sees a yield, an exchange listing, and the ease of buying one share. Second-order thinking asks how those benefits were earned and what they cost. High income is not free. Liquidity also means daily repricing. Professional management removes landlord work, but it also means the investor does not control property decisions or the timing of buys and sales.

This article is educational, not a recommendation. Past performance does not guarantee future results, and Baker 1031 does not provide tax or legal advice. A working understanding of the structures makes the trade-offs easier to assess; our complete REIT investor guide covers them in greater detail.

Pros: Income, liquidity, and diversification

The income case begins with REIT structure. To retain tax-advantaged status, a REIT must distribute at least 90% of its taxable income to shareholders. That requirement tends to make REIT yields higher than the broad stock market. For an investor seeking income tied to real estate without collecting rents, dealing with tenants, or owning a building directly, that can be useful. It is one reason REITs are often considered for retirement income.

Liquidity is a separate advantage, but it applies to publicly traded REITs. Their shares trade on stock exchanges, so an investor can generally buy or sell during the trading day at a market price. That is a sharp contrast with direct property ownership, where a sale can take months and entail negotiation, financing, and closing costs.

Diversification operates at two levels. A single REIT can own many properties across markets. And real estate has historically had only moderate correlation with stocks, so adding REITs to a portfolio of equities and bonds can help spread risk. The benefit is partial, not complete: publicly traded REITs are equities and can move with the stock market, particularly in the short run.

The core bull case is therefore straightforward. A REIT can offer real-estate income, daily liquidity when traded, and diversification within real estate and across asset classes—all without direct ownership.

Pros: Professional management and access

A REIT also makes real estate passive for the shareholder. A professional team sources assets, acquires and finances them, negotiates leases, manages tenants and maintenance, operates the portfolio, sells properties, and makes capital-allocation decisions. The investor owns part of an institutionally managed portfolio rather than a property that must be run personally.

Access is the companion advantage. A publicly traded REIT can be bought one share at a time through an ordinary brokerage account, often without a commission. The needed capital can be much smaller than the down payment, financing, and closing costs required to own property directly. REIT mutual funds and ETFs take the idea further, allowing a low-minimum purchase of a basket of REITs across companies and sectors.

There can be an inflation consideration, but it should not be overstated. Rents and property values have at times moved with inflation over long periods, and some leases include rent escalators. The relationship is not guaranteed and varies by sector, lease structure, and cycle. It is a factor to weigh, not an automatic hedge.

One share can represent a piece of an institutionally managed real-estate portfolio. That makes the exposure accessible and passive in a way direct ownership generally is not.

Cons: Rate sensitivity and volatility

The first major cost is interest-rate sensitivity. REITs commonly use debt to acquire and develop property. When rates rise, borrowing and refinancing can cost more, property values can come under pressure, and REIT yields can look less attractive relative to safer bonds. REIT share prices have often fallen in periods of rising rates for those connected reasons.

Mortgage REITs deserve particular care. Their profit depends on the difference between borrowing costs and the interest income they earn on real-estate financing. That makes them especially exposed to changes in rates and the spread between funding costs and asset yields.

Publicly traded REITs also have daily price volatility. Their shares respond to broad markets, investor sentiment, and interest-rate expectations—not just to the operating results of the underlying real estate. A traded REIT can decline sharply during a market sell-off even if its properties and rents are stable. The liquidity that makes it convenient is also what exposes it to a continuously changing market price.

This is an important contrast. A direct property owner may not receive a daily quote. A public-REIT investor does. The absence of a daily quote does not remove economic risk; it changes how immediately it is seen.

Cons: Tax treatment and other risks

Most ordinary REIT dividends are taxed as ordinary income rather than at the lower qualified-dividend rates. The reason is structural: the REIT generally has not paid corporate tax on income before distributing it, so the income is taxed mainly at the shareholder level. That can make REITs less tax-efficient in a taxable account than investments producing qualified dividends or long-term capital gains.

The 20% Section 199A deduction on qualified REIT dividends softens that result. At the top federal rate it can lower the effective rate on those dividends to roughly 29.6%. It does not make the question personal-tax advice, and it does not make every distribution identical. Some distributions can be return of capital, reducing basis rather than being currently taxed, while capital-gain distributions are taxed at capital-gain rates. The REIT reports the breakdown on Form 1099-DIV. Many investors therefore consider tax-advantaged accounts such as IRAs for REIT holdings, subject to their own tax situation and goals.

Sector and market risk remain. Office, retail, hotel, and other property sectors can underperform. Broad conditions can pressure all REITs. Distributions are not guaranteed and may be cut if property income declines.

Non-traded REITs add their own set of costs. Their redemption programs may cap or suspend redemptions, and they have historically included higher upfront fees and loads that reduce the amount of capital initially put to work. Ongoing asset-management fees may apply as well.

Key takeaways

• Pros: above-average income tied to the 90% distribution rule, liquidity for publicly traded REITs, diversification, professional management, and low-minimum access.
• Cons: interest-rate sensitivity and price volatility, mostly ordinary-income taxation, sector and market risk, and the illiquidity and fees that can accompany non-traded REITs.
• REIT dividends are mainly ordinary income. The 20% Section 199A deduction on qualified dividends can lower the effective top federal rate to roughly 29.6%.
• A REIT’s fit depends on goals, risk tolerance, time horizon, account type, and portfolio role. This is a trade-off, not a recommendation.

Putting the trade-offs in context

The pros and cons make more sense side by side. Income can be attractive, but it comes with ordinary-income taxation and rate sensitivity. Liquidity is genuinely useful, but it is the same mechanism that exposes a traded REIT to daily volatility. Professional management removes the burden of being a landlord, but it means the investor does not control the properties or the timing of purchases and sales.

Account type matters. Ordinary-income tax can be a meaningful drag in a taxable account and less immediate inside an IRA or another tax-advantaged account. Time horizon matters too. A few months of volatility can be uncomfortable, while the same movement may matter less to an investor with a multi-year horizon who is reinvesting distributions rather than selling under pressure.

Portfolio role matters most. Diversification is clearest when REITs are one part of a broader portfolio, not a concentrated bet on a single company or property sector. The high yield comes with ordinary-income tax; the liquidity comes with volatility; the passivity comes with less control. The question is not whether any one of those features wins. It is how much each matters in the investor’s situation.

Is a REIT right for you?

Three questions help frame the decision: What is the investment meant to accomplish? How much volatility or illiquidity can be tolerated? How long can the capital remain invested?

REITs can be a natural candidate for an investor seeking real-estate income and diversification without direct-property work. They are not the direct answer for an investor who needs to defer capital-gains tax on a property sale: REIT shares are securities, not like-kind real property, and are not eligible for a direct 1031 exchange.

Risk tolerance and horizon shape the answer. An investor who can accept rate-driven price swings and has a multi-year horizon may find traded-REIT volatility more manageable. An investor who needs a stable value or access to capital soon should give public-REIT price volatility and non-traded-REIT illiquidity more weight. A tax-advantaged account can reduce the ordinary-income drawback, though individual facts still matter.

The honest answer is a balanced “it depends.” A REIT can be right for one investor and wrong for another because their goals, risk capacity, time horizon, account type, and existing holdings differ.

How Baker 1031 helps you weigh REITs

Baker 1031 Investments helps investors weigh the income, liquidity, diversification, and professional-management benefits against rate sensitivity, volatility, ordinary-income taxation, and, for non-traded structures, illiquidity and fees. The aim is a balanced picture rather than a sales pitch, because fit depends on the investor’s situation.

REIT and non-traded-REIT interests and related securities are offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), and any recommendation follows a suitability review. Non-traded and private REITs typically require accredited or otherwise suitable investors. Publicly traded REITs trade through ordinary brokerage accounts.

Baker 1031 does not provide tax or legal advice. An investor’s CPA and attorney address the individual treatment of REIT dividends and the suitability of a tax-advantaged account. We do not promise yields or returns. REIT prices and distributions can fluctuate, and past performance does not guarantee future results.

Frequently Asked Questions

Are REITs a good investment?

It depends on goals, risk tolerance, and time horizon. REITs offer real advantages: above-average income because of the 90% taxable-income distribution rule, public-market liquidity for traded REITs, diversification, professional management, and low-minimum access. Their drawbacks include rate sensitivity, price volatility, mostly ordinary-income taxation, sector and market risk, and—in non-traded forms—illiquidity and fees.

They may fit an investor seeking real-estate income and diversification who can tolerate volatility over a multi-year horizon. They may be a poor fit for someone needing stable value, near-term liquidity, or direct capital-gains deferral from a property sale. Weigh the trade-offs against the individual situation rather than treating REITs as universally good or bad.

What are the main pros of investing in REITs?

The principal benefits are income, liquidity, diversification, professional management, and accessibility. The 90% rule tends to support higher yields than the broad stock market. Publicly traded shares can be bought and sold throughout the day. A single REIT often owns multiple properties, and a fund or ETF can add another level of diversification. Real estate has historically had only moderate correlation with stocks, although traded REITs can still move with equities in the short term.

The management team handles acquisition, financing, leasing, and operations, and an investor can buy a public REIT one share at a time, often commission-free, without a large down payment. Rents and values have at times offered an inflation consideration over long periods, but that relationship is not guaranteed.

What are the main cons of investing in REITs?

Key drawbacks are interest-rate sensitivity, price volatility, tax treatment, sector and market risk, and the illiquidity and higher historical fees of non-traded REITs. Rising rates raise borrowing costs, can pressure values, and can make REIT yields less competitive with bonds. Traded shares move with markets and sentiment. Most dividends are ordinary income, although the 20% Section 199A deduction can help qualified dividends.

Individual property sectors can weaken, broad markets can pressure the group, and distributions can be cut. Non-traded REITs may cap or suspend redemptions and can have higher upfront costs. Those are meaningful risks to weigh against the income and diversification benefits.

Why are REITs sensitive to interest rates?

REITs use debt to acquire and develop property, so higher rates can raise borrowing costs and squeeze profitability. Higher rates can also pressure property values and make bonds more appealing to income-focused investors, which can make REIT shares less attractive. Mortgage REITs are especially sensitive because their results depend on the spread between borrowing costs and the interest they earn.

REIT shares have often declined during rising-rate periods, even when underlying properties and rents remain stable. Rate sensitivity is one of the defining risks of REIT investing. Past performance does not guarantee future results.

How are REIT dividends taxed?

Most ordinary REIT dividends are taxed as ordinary income because the REIT has not paid corporate tax on the income before distribution. The 20% Section 199A deduction applies to qualified REIT dividends and can lower the effective top federal rate to roughly 29.6%. The 199A deduction was made permanent by the 2025 OBBBA legislation.

Some distributions are return of capital, which reduces cost basis rather than being currently taxed, and some are capital-gain distributions, which use capital-gain rates. Form 1099-DIV reports the split. Because the ordinary-income treatment can be less tax-efficient in taxable accounts, many investors consider an IRA or another tax-advantaged account. Baker 1031 does not provide tax advice; confirm current rules and individual treatment with a tax advisor.

Are REITs good for income?

They are often used for income because the 90% distribution rule requires payment of most taxable income, which tends to lift REIT yields above the broad stock market. Equity REITs in stable, income-oriented sectors—such as net-lease, healthcare, and certain residential property—can offer relatively steady distributions. Mortgage REITs can offer higher yields but typically carry greater interest-rate risk.

Income is not guaranteed. Distributions can be reduced when property income falls, and share prices can fluctuate. REITs should not be treated as bond-like or as a promise that current yields will persist. If income is the purpose, size and diversify the allocation appropriately.

Are REITs a good way to diversify a portfolio?

They can provide diversification in two ways. A single REIT generally owns multiple properties and markets, and a REIT fund or ETF adds a basket of multiple REITs. Real estate has historically behaved somewhat differently from stocks and bonds, so a REIT allocation can spread portfolio risk and add income tied to real estate.

The benefit is not complete. Public REITs still trade as equities and can move with the stock market, particularly in the short term. Use REITs as a component of a diversified portfolio, sized to the investor’s goals and risk tolerance rather than as a heavy single-sector or single-company concentration.

Are publicly traded REITs volatile?

Yes. Because their shares trade continuously, prices reflect the underlying real estate as well as investor sentiment, rate expectations, and broad market moves. A traded REIT can fall sharply in a market sell-off even when properties and rents are stable. The ability to buy and sell on a trading day is the same feature that marks shares to market in real time.

Non-traded REITs are valued periodically at NAV and can look smoother, but that often reflects infrequent valuation rather than lower underlying risk. Volatility may matter less to an investor with a long horizon who is not forced to sell during a downturn, but it is still a real consideration.

Should I hold REITs in a taxable account or an IRA?

Many investors consider a tax-advantaged account such as an IRA because most REIT dividends are ordinary income rather than qualified dividends. In a taxable account, that can be less efficient, though the 20% Section 199A deduction can lower the effective top rate on qualified REIT dividends to roughly 29.6%. In an IRA or a similar tax-advantaged account, the income is not taxed currently.

The appropriate placement depends on the investor’s full tax situation, portfolio, goals, and contribution limits. There may be reasons to hold REITs in a taxable account as well. Baker 1031 does not provide tax advice, so confirm the decision with a tax advisor.

Can I use a REIT in a 1031 exchange?

No. REIT shares are securities rather than like-kind real property, so they are not eligible for a direct 1031 exchange. An investor cannot sell investment property and exchange directly into REIT shares to defer capital-gains tax.

There can be an indirect route. An investor may exchange into a Delaware Statutory Trust (DST), which can be 1031-eligible like-kind real property. The DST’s property may later be acquired by a REIT in a 721 (UPREIT) exchange, converting the interest into operating-partnership units that can eventually convert to REIT shares while maintaining tax deferral. A direct 1031 into a REIT is not possible, and any intended tax treatment should be confirmed with a tax advisor before acting.

Do non-traded REITs have higher fees?

Historically, they generally have. Non-traded REITs have often carried selling commissions, dealer-manager fees, organizational and offering expenses, and ongoing asset-management fees. Those costs can reduce the amount of an investor’s capital initially deployed into real estate.

Public REIT shares are generally low cost to own through a brokerage account, often commission-free, and REIT funds or ETFs usually charge a modest expense ratio rather than a large upfront load. Some newer non-traded structures have reduced certain costs, but the overall fee load has generally remained higher. Review a non-traded REIT’s fees and compare them with a lower-cost traded alternative before committing capital.

Are REITs a hedge against inflation?

REITs can be an inflation consideration, but they are not a reliable automatic hedge. Over long periods, real-estate rents and values have sometimes moved with inflation, and rent escalators can allow some leases to rise with the general price level. The result varies by sector, lease terms, and the economic cycle.

Inflation can also bring higher interest rates, which may pressure REIT prices despite any rent or value linkage. Treat a REIT as one imperfect tool among several, not a guarantee of inflation protection, and weigh rate sensitivity alongside the possible inflation benefit. Past performance does not guarantee future results.

How much of my portfolio should be in REITs?

There is no single correct percentage. The appropriate allocation depends on goals, risk tolerance, time horizon, the rest of the portfolio, whether the REIT role is income, diversification, or growth, and whether it is held in a taxable or tax-advantaged account.

Many investors use REITs as one component of a diversified portfolio rather than a concentrated position. An allocation large enough to swing the whole portfolio sharply may create more rate, volatility, and sector risk than intended. Choose a deliberate size tied to the role real estate is meant to play, and consider discussing the full picture with a financial professional.

Are REITs safer than buying property directly?

Neither is universally safer; the risks are different. REITs are passive, diversified, and, if publicly traded, liquid. They can avoid the concentration of one building, the burden of tenant and maintenance management, and the illiquidity of direct ownership. But publicly traded REITs have daily market and rate-driven volatility, distributions can be cut, and the shareholder does not control the properties or timing of transactions.

Direct ownership can provide control, potential leverage, and direct tax benefits such as depreciation. It is also concentrated, illiquid, management-intensive, and exposed to one property and tenant base. REITs exchange concentrated, hands-on property risk for the market-driven, passive risks of a security. The better fit depends on the investor’s objectives, preferred level of control, and liquidity needs.

How does Baker 1031 help me decide whether REITs are a good investment for me?

Baker 1031 helps investors weigh income, liquidity, diversification, and professional management against rate sensitivity, volatility, ordinary-income taxation, and the illiquidity and fees that can accompany non-traded structures. The goal is to determine whether a REIT fits goals, risk tolerance, and time horizon—not to offer a universal recommendation.

REIT and non-traded-REIT interests are offered through Aurora Securities, Inc. (member FINRA/SIPC), and recommendations follow a suitability review. Non-traded and private REITs typically require accredited or otherwise suitable investors, while public REITs trade through ordinary brokerage accounts. Baker 1031 does not provide tax or legal advice; an investor’s CPA and attorney address those circumstances. We do not promise yields or returns, and past performance does not guarantee future results.

Glossary

• REIT: A company that owns, operates, or finances income-producing real estate.
• 90% Distribution Rule: The requirement to pay out at least 90% of taxable income.
• Dividend Yield: Annual dividends divided by share price, often higher for REITs.
• Liquidity: The ability to sell and access capital readily.
• Diversification: Spreading risk across assets, sectors, or property types.
• Professional Management: A team handling acquisition, leasing, and operations for an investor.
• Interest-Rate Sensitivity: The tendency of REIT prices to fall when interest rates rise.
• Market Volatility: Daily price swings affecting publicly traded REITs.
• Ordinary Income: Income taxed at standard rates, as most REIT dividends are.
• Section 199A Deduction: The 20% deduction on qualified REIT dividends.
• Equity REIT: A REIT that owns property and earns income from rents.
• Mortgage REIT (mREIT): A REIT that finances real estate and is highly rate-sensitive.
• Non-Traded REIT: An SEC-registered, unlisted REIT with limited liquidity and higher fees.
• Sector Risk: The risk that an individual property sector underperforms.
• Tax-Advantaged Account: An IRA or similar account where REIT income is not taxed currently.
• Suitability Review: Assessing whether an investment fits an investor’s situation.

Sources & References

1. U.S. Securities and Exchange Commission. Investor.gov — Real Estate Investment Trusts (REITs)
2. Nareit. What’s a REIT (Real Estate Investment Trust)?
3. FINRA. Real Estate Investments
4. IRS. About Form 1099-DIV, Dividends and Distributions

Disclosures

This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.

Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.

Filed under

REIT · REITs

About the author

Jerry Baker
Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE

Jerry founded Baker 1031 to bring institutional underwriting discipline to the 1031 exchange. He spent more than a decade on Wall Street working on $10B+ of real estate before building diversified DST portfolios for individual investors. Read full bio →

Reviewed by: Lori Kamen — President & CCO, Aurora Securities, Inc. (FINRA Series 4 / 7 / 24 / 53 / 63 / 66), the supervising registered principal. Last reviewed June 2026. Baker 1031 reviews its educational content periodically for accuracy and regulatory compliance. Securities offered through Aurora Securities, member FINRA/SIPC.

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A practical stance

I would manage capital by deciding the REIT’s role before deciding the ticker: income, diversification, or both. Then I would keep the allocation small enough that rate moves, a sector problem, or a distribution cut cannot dictate the rest of the portfolio. A yield is a starting point for questions, not an answer.

Which trade-off carries the most weight for you right now: income, liquidity, taxes, or the risk behind the price? Share your perspective in the comments.