Real estate is one of the oldest paths to passive income, but it comes with tenants, toilets and mortgages. Real Estate Investment Trusts, or REITs, offer a different route: you buy shares in a company that owns income-producing property, and the company pays you a share of the rent as dividends. You get real estate exposure with the liquidity of a stock, no landlord duties, and a starting investment as small as the price of one share.

How REITs Work and What They Pay

A REIT is legally required to pay out at least 90% of its taxable income as dividends, which is why their yields are typically higher than the stock market average. In 2026, broad REIT index funds yield around 3% to 4%, while individual REITs in sectors like industrial warehouses or data centres can yield more. The income comes from real rent: apartments, offices, warehouses, shopping centres, hospitals and cell towers. When you own a REIT, you own a slice of those rent cheques, minus the management costs.

The Main Types Worth Knowing

Equity REITs own and operate property, and they are the most common type for income investors. Mortgage REITs lend money for real estate instead of owning it, and they pay higher yields with higher risk, because their profits depend on the gap between borrowing and lending rates. Sector REITs focus on one property type, such as healthcare, industrial or residential, and their performance depends on that sector's health. For most beginners, a diversified REIT index fund is the right starting point, because it spreads the risk across hundreds of properties and dozens of sectors.

The Risks and the Tax Catch

REITs are not a free lunch. Their prices fall when interest rates rise, because higher rates make their dividends less attractive and raise their borrowing costs. Their dividends are mostly taxed as ordinary income, not at the lower qualified dividend rate, which makes them better suited to a tax-advantaged account like a Roth IRA than a taxable brokerage. And like any stock, a REIT can cut its dividend if its tenants struggle. The sensible approach is to treat REITs as one slice of a diversified portfolio, around 5% to 10%, not as the whole strategy.

REITs vs Rental Property: An Honest Comparison

The comparison every would-be real estate investor makes is REITs versus buying a rental property, and the honest answer is that they solve different problems. A rental property can produce higher returns, because leverage, rent increases and tax deductions work in your favour, but it demands time, capital and tolerance for 2 a.m. plumbing calls. A REIT produces lower returns on average, but it demands nothing: no tenants, no maintenance, no mortgage application, and you can sell it in seconds. The rental property is a part-time job with an investment attached. The REIT is an investment with no job attached.

The numbers tell the story. A rental property might yield 6% to 10% a year after costs, but that includes your labour, which is rarely counted. A REIT index fund yields 3% to 4% in dividends plus whatever the share price does, with zero hours of work. For a FIRE saver whose time is the scarcest resource, the REIT usually wins, because the goal is freedom, not a second job. If you love property and want the higher return, buy the rental. If you want the income without the work, buy the REIT, and spend the saved hours on something you actually enjoy.

REITs are the closest thing to passive real estate income without becoming a landlord. Start with a low-cost REIT index fund, hold it in a tax-advantaged account if you can, and treat the dividends as one income stream among several. Real estate has built wealth for generations, and a REIT lets you participate with the price of a single share.