What is the disadvantage of REITs?

While REITs provide investors with several benefits, they also have some disadvantages. Cons of investing in REITs include interest rate sensitivity, lower growth potential, higher taxes on dividend income, market volatility, and the potential for underperformance due to mismanagement.

Can you really make money from REITs?

You can make money from REITs. Most REITs pay dividends, which provide their investors with a steady stream of passive income. The value of REIT share prices rises as the value of their real estate portfolios grows via property appreciation and new investments.

What is the average return of a REIT?

The National Association of REITs has been tracking REIT returns since 1972. The average REIT's total return is 12.6% annually since 1972, which has outperformed the annualized return of the S&P 500 during that period (8%).

Investing in REITs: Are REITs a Good Investment?

Congress created real estate investment trusts (REITs) to allow anyone to invest in real estate. The structure leveled the playing field that was previously available only to those with a high net worth. Today, anyone with an online brokerage account and some spare cash can invest in REITs with just a few clicks.

Overall, REITs have been a good investment throughout the years. Here's a closer look at why investors should consider adding REITs to their portfolios.

Why REITs make a good investment

REITs offer investors several benefits that make them an ideal fit in any investment portfolio. These include competitive long-term performance, attractive income, liquidity, transparency, and diversification.

Competitive long-term performance

Historically, REITs have performed well compared to stocks, especially over long periods. For example, since tracking started in 1972, REITs -- as measured by the FTSE Nareit All Equity REITs Index -- have produced an average compound annual total return (stock price appreciation and dividend income) of 12.4%. That has outperformed the S&P 500's 8% average annual return during that period.

In short, REITs have outperformed stocks over the long term.

Data source: Nareit and YCharts.
TIME PERIOD	S&P 500 (ANNUALIZED RETURN)	FTSE NAREIT ALL EQUITY REITS (TOTAL ANNUAL RETURN)
1972-2025	8.1%	12.4%
Past 40 years	9.1%	11.2%
Past 30 years	8.4%	11.1%
Past 25 years	6.8%	11.4%
Past 20 years	8.9%	8.7%
Past 10 years	12.6%	6.8%
Past 5 years	12.6%	5.0%
Past year (2025)	16.4%	2.3%

Attractive income

One reason REITs have generated solid total returns over the long term is that most pay attractive dividends. For example, as of early 2026, the average REIT yield topped 4%, nearly four times the dividend yield of stocks in the S&P 500 (1.10%). That income adds up over time, as it makes up the bulk of a REIT's total return over the long term.

REITs pay attractive dividends because they must distribute 90% of their taxable income to remain compliant with IRS regulations. However, most REITs pay out more than 90% of their taxable income because their cash flows, as measured by funds from operations (FFO), are often much higher than net income, since REITs tend to record large depreciation expenses each year.

Many REITs have excellent track records of steadily increasing their dividends. For example, Federal Realty Investment Trust (FRT -0.87%) delivered its 58th consecutive annual dividend increase in 2025, the longest in the REIT industry. Many other REITs have decades-long streaks of increasing their dividends at least once each year.

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Liquidity

Real estate is an illiquid investment, meaning an investor can't readily convert it to cash. Suppose an owner of a single-family rental property needed to sell to cover a big expense. They'd have to list the property, wait for an acceptable offer, and hope they don't run into any snags leading up to closing. It could take months to convert the property into cash, depending on market conditions. They'd also likely need to pay a real estate agent fee as well as other closing costs.

On the other hand, if a REIT investor needed money, they could log on to their online brokerage account and sell REIT shares anytime the market is open. A REIT investor also wouldn't pay any fees to sell since most brokers don't charge commissions.

Transparency

Many private real estate investments operate with little oversight, so real estate sponsors can make decisions that aren't always in their investors' best interests.

However, REITs are highly transparent. Independent directors, analysts, auditors, and the financial media all monitor REITs' performance. They're also required to report their financial results to the U.S. Securities and Exchange Commission (SEC). This oversight provides REIT investors with a level of protection, preventing management teams from easily taking advantage of them for their own gain.

Diversification

REITs enable investors to diversify their portfolios across the commercial real estate market, helping reduce their correlation to the stock and bond markets. That diversification lowers an investor's risk profile without negatively impacting returns.

For example, a 2024 study showed that adding REITs to a traditionally balanced portfolio of 60% stocks and 40% bonds increased an investor's returns over the long term. Reallocating 10% of a 60/40 portfolio to REITs (55% stocks/35% bonds/10% REITs) improved returns from 6.4% to 6.9% over the prior 25 years. Meanwhile, a 20% allocation to REITs (50% stocks/30% bonds/20% REITs) boosted returns to 7.2% annually.

Adding REITs to a portfolio should improve its risk-adjusted returns and help smooth out volatility.

REITs are a good investment for any portfolio

REITs have historically produced solid returns. They also offer investors several other benefits, such as dividend income and diversification, making them a good addition to any investor's portfolio.

FAQ

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About the Author

Matt DiLallo has been a contributing Motley Fool stock market analyst specializing in covering dividend-paying companies, particularly in the energy and REIT sectors, since 2012. He also covers pre-IPO companies, ETFs, and other investing topics. He holds an MBA from Liberty University.

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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.