How to Invest in REITs in 2026: Returns, Sectors, FFO and AFFO, Taxes, and Non-Traded REIT Risks

REITs let you own a share of warehouses, apartments, cell towers, data centers, and shopping centers without buying or managing property. Because they must pay out most of their taxable income, they pay higher dividends than most stocks. They also behave like stocks day to day, fall hard when interest rates jump, and send you a tax bill that is higher than for most dividends.

Recent results show the range. The FTSE Nareit All Equity REITs index returned 2.3% in 2025 while broad US stocks gained about 17%. In 2026 it was up 14.5% through August, ahead of the major stock indexes, and yielded 3.68%, compared with about 1% for the S&P 500. This guide covers how REITs work, the main sectors, how to read FFO and AFFO, how the dividends are taxed in 2026, and what to know before buying a non-traded REIT.

How the REIT structure works

To qualify under Section 856, a REIT must hold mostly real estate assets, earn mostly real estate income such as rents and mortgage interest, and have at least 100 shareholders. It must distribute at least 90% of its taxable income each year, and in exchange it deducts those dividends and generally pays no corporate income tax. The One Big Beautiful Bill Act raised the share of assets a REIT can hold in taxable REIT subsidiaries, which run non-rental businesses such as hotel operations or tenant services, from 20% to 25% starting in 2026.

Because REITs pay out most of their income, they grow mainly by issuing new shares or borrowing. That makes them sensitive to the cost of capital: when interest rates and required yields rise, share prices fall and expansion slows. Equity REITs fell by about a quarter in 2022 as rates climbed, even though most of their properties kept collecting rent.

Types and sectors

• Equity REITs own property and earn rent. They make up most of the market.
• Mortgage REITs (mREITs) own mortgages or mortgage-backed securities and earn the spread between their borrowing costs and their loan yields. They borrow heavily, and their book values can fall sharply when rates move. The FTSE Nareit Mortgage REITs index yielded 13.15% at the end of August 2026; much of that yield has historically been offset by falling share prices over time.
• Listed REITs trade on exchanges. Non-traded REITs are registered with the SEC but not listed, and private REITs are sold only to accredited investors.

Sector results diverge widely. In 2026 through August, Nareit's lodging and resort index returned 36.6%, data centers 33.0%, and specialty REITs 30.2%. Office remains the weakest area: the delinquency rate on office loans in commercial mortgage-backed securities reached a record 11.91% in July 2026, according to Trepp. A broad index fund spreads your money across all of these; picking sectors means betting on which trends continue.

Reading FFO and AFFO

Net income understates what real estate earns, because accounting depreciation reduces earnings even when a building holds or gains value. REITs therefore report funds from operations (FFO) under a definition set by Nareit: net income, plus real estate depreciation and amortization, minus gains (plus losses) on property sales, plus impairment write-downs. Many also report adjusted FFO (AFFO), which subtracts the recurring capital spending needed to keep properties leased and removes non-cash items such as straight-line rent. AFFO has no standard definition.

An illustration with a REIT's annual figures:

The dividend is 69% of FFO, which looks comfortable, but 92% of AFFO, which leaves little room if a large tenant leaves. Check the AFFO payout ratio, how the REIT defines AFFO, and whether it has been funding dividends with asset sales or new debt.

Other numbers worth checking: debt relative to earnings before interest, taxes, depreciation, and amortization; when the debt matures and at what rates it will refinance; occupancy and lease expirations; and the share price relative to estimated net asset value (NAV), the market value of the properties minus debt. REITs trading well below NAV sometimes sell properties or buy back shares; those trading above it can grow by issuing stock.

How REIT dividends are taxed

REIT dividends usually come in up to three parts, shown on your Form 1099-DIV:

• Ordinary dividends, most of which are "Section 199A dividends." Individuals can deduct 20% of these under the qualified business income rules, which the One Big Beautiful Bill Act made permanent (IRS overview). You must hold the shares more than 45 days around the ex-dividend date to claim it.
• Capital gain distributions, taxed at long-term capital gains rates.
• Return of capital, which is not taxed when received but lowers your cost basis, increasing the gain when you sell.

An illustration of $10,000 of Section 199A REIT dividends compared with $10,000 of qualified dividends from an ordinary stock:

The 199A deduction does not reduce the 3.8% net investment income tax, which is why the top combined rate is 33.4%. For most investors, REITs are a good fit for IRAs and 401(k)s, where the dividends are not taxed each year, while broad stock index funds go in taxable accounts. Our tax-efficient investing guide covers asset location in more detail.

Listed, non-traded, and private REITs

Non-traded REITs report steadier values because appraisals move slowly, which can make them look less risky than listed REITs holding similar buildings. When many investors ask for their money at once, redemptions are paid pro rata within the caps, commonly about 2% of NAV a month and 5% a quarter, and the rest waits. That happened at several of the largest non-traded REITs in late 2022 and 2023. The SEC's investor page on REITs lists the questions to ask before buying one. Our private real estate funds guide and real estate crowdfunding guide cover other private options.

How much and how to buy

REITs are already in broad stock index funds, making up a few percent of the US market, so a total market fund gives you some exposure. Investors who want more usually add a low-cost REIT index fund rather than picking individual REITs, especially if they already own their home or rental property, which is concentrated real estate exposure.

Points to decide before adding:

• Role. Income, diversification, or a sector view such as data centers. Each points to a different product.
• Account. An IRA or 401(k) if possible, because of the dividend tax.
• Size. Enough that it matters, but not so much that a 2022-style drop would change your plans. Rebalance on a schedule; our rebalancing guide shows how.
• Individual REITs. If you buy them, compare AFFO payout, debt maturities, and price to NAV, and spread across sectors.

For owning buildings directly, see our commercial real estate guide, and for how REITs fit with other income investments, the dividend investing guide.

This guide is for informational purposes only and does not constitute investment or tax advice. REITs can lose value from rising interest rates, property market declines, and tenant problems. Figures are as of August and September 2026; the FFO and tax tables are illustrations. Consult a qualified financial adviser or tax professional before investing.