How Do Real Estate Investment Trusts (REITs) Make Money?

Real Estate Investment Trusts (REITs) make money primarily by owning and managing income-producing property, and distributing the majority of their profits to shareholders as dividends. The major sources of REIT income are rental payments, capital gains on property sales, and, in some cases, mortgage interest. Their business model is designed to provide investors with a steady and tax-efficient income stream.​

What is a REIT?

A REIT is a publicly-listed company that owns, operates, or finances income-generating real estate across various sectors, from office buildings and retail centres to industrial warehouses and residential blocks. Investors buy shares in a REIT, gaining exposure to a diversified and professionally managed property portfolio without having to buy physical properties directly.​

Key Ways REITs Generate Revenue

1. Rental Income

The main engine of profit for most REITs is rent paid by tenants in the properties they own. Legislation often requires that at least 75% of a REIT’s gross income comes from rent, and 75% of its assets are invested in real estate available for rental. Properties may include offices, retail space, care homes, logistics warehouses, hotels, or apartments, depending on the REIT’s focus.​

A major enhancement to rental earnings comes from portfolio diversification, as REITs often invest in mixed-use or multi-sector assets across numerous locations, which helps to mitigate risks associated with individual tenants or localised market downturns.

2. Capital Gains

REITs frequently buy and sell real estate assets. Profits made when a property is sold for more than its purchase price are capital gains, which can be distributed to shareholders or reinvested in new assets. However, most REITs do not have to distribute capital gains, with the main focus on ongoing rental yields.​

Capital gains are realised not only when selling direct assets but also through the sale of shares in property-owning subsidiaries, reflecting the flexibility in how REITs can unlock value.​ REITs can redevelop, refurbish, or reposition properties to increase their resale value and market value rebasing of new acquisitions may recognise capital gains even before traditional sale events.

3. Interest Income

Some REITs, called mortgage REITs, do not own physical property but rather, invest in mortgages and mortgage-backed securities, earning money from the interest on these loans.​

Mortgage REITs often operate with significant leverage, borrowing against their own portfolio to increase returns. This leads to higher dividend yields than traditional equity REITs but with greater sensitivity to interest rate changes and credit risk.​ In addition to interest, mortgage REITs may realise capital gains by trading mortgage assets, depending on market conditions and asset performance.

Legal Requirements and Payouts

A defining feature of REITs, especially in the UK and Europe, is the legal requirement to distribute at least 90% of their taxable profits from rental activities to shareholders as dividends. In exchange for this high payout, REITs benefit from an exemption from corporation tax on rental profits, though gains or profits from non-rental activity may still be taxed normally.​

How Investors Benefit

Because of these rules, REITs typically offer higher and more regular dividends than many other equities, making them attractive for income investors or those seeking passive income. Investors gain liquid and diversified exposure to the property sector, profiting from both the steady rental streams and potential property appreciation. Most property REITs pay dividends quarterly, but payment frequency can vary.

For further information read What Are REITs? A Beginner's Guide to Real Estate Investment Trusts