The average rental property investor deals with late-night maintenance calls, problem tenants, property taxes, and the constant worry of vacancies. The average REIT investor? They check their dividend deposits and move on with their day.

Real Estate Investment Trusts (REITs) offer all the income benefits of real estate ownership with none of the landlord headaches. Here's how to build a real estate portfolio that pays you monthly.

What Exactly Is a REIT?

A REIT is a company that owns, operates, or finances income-producing real estate. By law, REITs must:

  • Distribute at least 90% of taxable income as dividends
  • Invest at least 75% of assets in real estate
  • Derive at least 75% of income from real estate-related sources

That 90% distribution requirement is why REITs typically yield 3-8%—significantly higher than the S&P 500's ~1.5% dividend yield.

When you buy shares of a REIT, you're buying fractional ownership of their entire real estate portfolio—potentially hundreds of properties across the country or world.

"REITs democratize real estate investing. You can own a piece of a skyscraper for the price of a dinner."

Types of REITs

Residential REITs

Own apartment buildings, single-family rentals, and manufactured housing. Examples: AvalonBay (AVB), Equity Residential (EQR), Invitation Homes (INVH). Tends to be stable—people always need housing.

Retail REITs

Own shopping centers, malls, and freestanding retail. Examples: Realty Income (O), Simon Property Group (SPG), National Retail Properties (NNN). Higher yields but e-commerce concerns.

Office REITs

Own office buildings and business parks. Examples: Boston Properties (BXP), Alexandria Real Estate (ARE). Remote work trends have pressured this sector.

Industrial REITs

Own warehouses, distribution centers, and logistics facilities. Examples: Prologis (PLD), Duke Realty. E-commerce growth has made this sector boom.

Healthcare REITs

Own hospitals, senior housing, and medical office buildings. Examples: Welltower (WELL), Ventas (VTR). Aging population provides tailwind.

Data Center REITs

Own facilities housing servers and networking equipment. Examples: Digital Realty (DLR), Equinix (EQIX). Cloud computing drives demand.

Specialty REITs

Cell towers (American Tower, Crown Castle), self-storage (Public Storage, Extra Space), timberland (Weyerhaeuser), and more niche categories.

Why REITs Belong in Your Portfolio

Income generation. Average REIT yields 4-5%, with many quality REITs yielding 5-7%. That's 3-4x the S&P 500 dividend yield.

Diversification. REITs have historically had low correlation with stocks and bonds. When stocks zig, REITs sometimes zag.

Inflation hedge. Real estate values and rents typically rise with inflation. Your dividend purchasing power is somewhat protected.

Professional management. REIT management teams handle property acquisition, leasing, maintenance, and financing. You just collect dividends.

Liquidity. Unlike physical real estate, REIT shares can be bought or sold in seconds during market hours.

The Monthly Income REIT: Realty Income

Realty Income (ticker: O) deserves special mention. It's earned the nickname "The Monthly Dividend Company" for good reason:

  • Paid dividends monthly since 1969
  • Increased dividends for 100+ consecutive quarters
  • Owns 11,000+ properties leased to major tenants (Walgreens, Dollar General, FedEx)
  • Current yield around 5-6%

For passive income seekers, O is often a cornerstone holding. Its consistency is remarkable.

Building a REIT Portfolio

Option 1: REIT ETFs (simplest)

  • VNQ (Vanguard Real Estate ETF): 0.12% expense ratio, 160+ holdings
  • SCHH (Schwab US REIT ETF): 0.07% expense ratio, 100+ holdings
  • IYR (iShares US Real Estate): 0.40% expense ratio, oldest real estate ETF

One purchase diversifies across the entire REIT market. Perfect for beginners.

Option 2: Individual REITs (more control)

Build a portfolio of 5-10 REITs across different sectors:

  • 2-3 residential/retail for stability
  • 1-2 industrial for growth
  • 1-2 healthcare for demographics
  • 1-2 specialty for diversification

Option 3: Hybrid approach

Core position in a REIT ETF (60-70%), with individual REITs for sectors or companies you particularly like (30-40%).

The Tax Consideration

REIT dividends are typically taxed as ordinary income—not the lower qualified dividend rate. This makes REITs ideal for tax-advantaged accounts:

Best locations for REITs:

  • Traditional IRA or 401(k) - dividends compound tax-free until withdrawal
  • Roth IRA - dividends and growth are tax-free forever
  • HSA - if used for qualified medical expenses, completely tax-free

In taxable accounts: Still viable, but consider holding more in municipal bonds or growth stocks in taxable, and overweighting REITs in retirement accounts.

How Much Income Can REITs Generate?

At a 5% average yield:

  • $25,000 invested: $1,250/year ($104/month)
  • $50,000 invested: $2,500/year ($208/month)
  • $100,000 invested: $5,000/year ($417/month)
  • $250,000 invested: $12,500/year ($1,042/month)
  • $500,000 invested: $25,000/year ($2,083/month)

Plus, REIT dividends typically grow 2-5% annually—your income increases even without adding new money.

REIT Red Flags to Avoid

Extremely high yields (10%+). Usually indicates a REIT in distress. The dividend may be cut, and share price likely to fall.

High debt levels. REITs with debt-to-EBITDA above 6x are vulnerable if interest rates rise or vacancies increase.

Poor occupancy rates. Below 90% occupancy signals trouble finding or keeping tenants.

Dividend cuts. A REIT that cut dividends recently may cut again. History of consistent increases is preferable.

Concentrated tenant base. If one tenant represents 20%+ of income, that tenant's struggles become your struggles.

Getting Started This Week

Day 1: Research VNQ or SCHH. Understand what's in these REIT ETFs.

Day 2: Determine how much you can allocate to REITs (5-15% of portfolio is typical).

Day 3: Decide: ETF only, individual REITs, or hybrid approach.

Day 4: Purchase your first REIT position in a tax-advantaged account if possible.

Day 5: Set up DRIP (dividend reinvestment) to automatically compound your returns.

The Bottom Line

REITs let you be a real estate investor without the midnight plumbing calls, difficult tenants, or property management headaches. You collect rent (in the form of dividends) from some of the highest-quality real estate in the world.

The income is real. The diversification is valuable. And the passive nature is exactly what the word "passive" should mean.

Start building your real estate empire—one share at a time.