August 28, 2025
Want real estate income without buying buildings? Meet REITs
Many budding investors assume the only way into real estate is by buying a property. However, this beginner’s guide to Real Estate Investment Trusts (REITs) reveals there are other paths. You can start investing by purchasing shares in companies that own residential properties or by backing the debt behind them, gaining exposure to portfolios of real estate loans. Either way, you’re investing in professionally managed real estate without having to buy property yourself.
What Is the Point of REITs?
If you’ve read our primer on what REITs are, you know they typically allow people to invest in real estate through shares or debt. However, their real purpose goes deeper: REITs exist to give everyday investors a fair shot at owning a slice of real estate. Instead of requiring one person to buy a high-rise or finance home flippers, a REIT pools funds from many investors and spreads them across multiple assets.
That idea officially took shape in 1960, when Congress passed the Cigar Excise Tax Extension. Tucked into that law was the framework that allowed REITs to exist, opening the door for regular investors to take part in large-scale real estate for the first time.
REIT investments can take different forms. Some are run by companies that own and operate income-producing buildings like apartments, offices, or warehouses, collecting rent just as any landlord would. Others hold real estate loans or mortgage-backed securities, earning money from the interest borrowers pay. A smaller group mixes both, holding properties while also financing projects to balance income streams.
The point is simple: REITs make investing more accessible and more diversified. They’ve grown into a vital tool for anyone who wants real estate exposure but prefers the convenience of a stock or CD-like investment.
How Does a REIT Generate Income?
REITs exist to take the cash flow produced by real estate and pass it through to investors. How you earn cash depends on the strategy behind the REIT.
How REITs Earn Income From Rentals
Some REITs focus on owning commercial or residential properties. A multifamily REIT, for example, might own thousands of apartments across different cities.
Every time tenants pay rent, a portion of that income eventually flows back to shareholders. The same idea applies to single-family rental REITs that purchase homes in bulk and lease them to families or individuals. In both cases, investors share in the rental income without ever having to act as landlords.
How Mortgage and Debt REITs Generate Income
Other REITs operate on the financing side of the equation. Instead of holding buildings, they purchase or originate mortgages and other real estate loans.
Here, the income comes from the interest borrowers pay back. To better illustrate this, a debt-focused REIT could hold portfolios of residential loans, providing investors exposure to real estate lending markets without issuing loans themselves.
Splitting the Difference
Then there are hybrid REITs, which hold both properties and loans, aiming to balance the steadiness of rental payments with the potentially higher returns from debt. What ties all of these approaches together is the way REITs are structured.
Are REITs Popular With Investors?
The short answer is yes. REITs have carved out a lasting place in retirement accounts and income-focused portfolios because of their dividend or returns potential and diversification benefits. While equity REITs get the most attention, mortgage or debt-based REITs, tied to loans, are particularly appealing to many investors who want exposure to the credit side of real estate without directly acting as a lender.
REITs have become a go-to option for both seasoned and beginner investors because they offer transparency and regulation you don’t always find in other investments. By law, they must meet strict reporting standards, giving investors confidence in steady returns. For anyone curious about how to get started in real estate investing, REITs, in particular, debt investing, provide an easy entry point.
What Tax Advantages do REITs Offer?
REITS are legally required to distribute all of their taxable income to investors, minus any incurred costs. That’s why dividends or returns are the main attraction. For investors, this means REITs function less like growth stocks and more like income-producing vehicles without the burden of direct ownership.
Typically, REITS are structured to avoid corporate-level taxation, meaning they don’t pay federal income tax as long as at least 90% of taxable income passes to shareholders. That structure is what makes them appealing for everyday investors searching for income.
Still, it’s essential to understand that while REITs pass income through, the dividends or returns you receive don’t all get the same tax treatment. Remember, it is always best to consult with a tax professional to understand your responsibilities.
Equity REITs
Dividends typically represent rental income collected from tenants. These are taxed as ordinary income for shareholders, though a portion may qualify for the 20% qualified business income deduction under current tax law.
Mortgage or Debt REITs
Since these REITs earn money from interest payments, their returns are taxed as ordinary income. For investors seeking passive income streams from alternative real estate options, the tradeoff could be higher yields compared to some equity REITs.
Why Debt-Focused REITs Are Appealing From a Tax Angle
Investors drawn to passive income often find mortgage or debt-focused REITs attractive because of the possibility of higher dividends. While the payouts are taxed as ordinary income, the consistent yield may outweigh the tax burden for those seeking steady cash flow.
Can You Live Off REIT Returns?
Some investors build entire income strategies around REITs. For retirees or income-focused investors, they can provide a reliable stream of cash. That said, living entirely off REIT income requires precise planning and research.
Remember, the yield varies depending on the type of REIT, market conditions, and management decisions. As with most types of investing, combining REITs with other investments is often a wiser approach than relying on them exclusively.
What Should You Consider Before Investing in REITs?
Like any investment, REITs come with both opportunities and risks. Diversification is key. Instead of investing all your money in a single REIT that focuses on properties with identical characteristics, such as a shared geography, consider diversifying across different sectors or balancing REIT exposure with other assets.
Options like Groundfloor’s Flywheel Portfolio, which is one type of REIT to invest in, takes this idea further by allowing investors diversify into real estate debt across hundreds of projects, aiming for consistent returns with reduced risk.
Whether you’re looking at REITs or other real estate investing opportunities, the goal is the same: Broaden your exposure while keeping your portfolio balanced, and that’s precisely what you get with Flywheel. Start investing.
