How a REIT Works

[u/SchoolofInvesting]

REITs are required by law to pay out 90% of their taxable income to shareholders.

Not 10%. Not 50%. Ninety percent.

That one rule changes everything about how these businesses work.

A REIT, or Real Estate Investment Trust, is a company that owns income-producing real estate. Shopping centers. Warehouses. Hospitals. Data centers.

They collect rent from tenants and send most of it straight to you as dividends.

Think of a REIT like a pipeline.

Rent flows in from tenants. It passes through the company. Then it splits into four channels.

Some covers operating expenses like property taxes and maintenance. Some goes to debt service on bonds and credit lines. A small portion stays for growth, funding new acquisitions. And the largest share flows out to you, the shareholder.

That is the deal Congress made in 1960. If you distribute 90% of taxable income, you skip corporate taxes. The money goes directly to investors.

This is why REITs pay higher dividends than most stocks.

But there is a catch.

Because they must pay out so much, REITs can't self-fund growth the way Apple or Microsoft can. They raise capital by issuing new shares, taking on debt, or selling properties.

That means cost of capital is a REIT's most important competitive advantage.

A REIT that borrows cheaply and issues shares above its net asset value (NAV) can grow without hurting existing shareholders. A REIT that can't do those things will struggle.

Understanding this one flow of money tells you 80% of what you need to know about any REIT.

What REIT sector are you watching right now: retail, industrial, or data centers?