REITs — Real estate investing without being a landlord
REITs let you own property through the stock market. What they pay out, how they're taxed, and whether a world ETF already holds enough of them.
An apartment building earns rent while you sleep. That is the appeal of property, and it is also why property makes a bad second job: the boiler does not care that you already have a first one. A REIT separates the two. You own a slice of the buildings; somebody else owns the boiler.
The structure is not a marketing invention. To keep its tax exemption, a US REIT has to distribute at least 90% of its taxable income to shareholders, and the German REIT law of 2007 copied the same rule. That one obligation explains both the high distribution yields and the limited growth, because a company that hands over nearly everything it earns cannot fund much out of its own pocket.
The 90% applies to taxable income, not to cash flow. In a weak year a REIT can distribute more than it earned, which is a return of capital rather than profit. A large distribution is not evidence that the buildings are doing well.
Why the 90% rule makes the price jumpy
Because almost all of the income leaves the company, growth has to be financed with new shares or new debt. That is the trade an investor accepts: income today, in exchange for a company that cannot reinvest much of its own money.
The second consequence is more expensive. A REIT is priced as an income stream, and income streams are valued against interest rates. A share paying a €4 distribution is worth roughly €133 when the market demands a 3% yield and €100 when it demands 4%. Same €4, same buildings, a quarter of the value gone.
That is why REIT prices fall when bond yields rise and the rents are fine. It is the most useful fact to hold before buying one.
What a 4% distribution does over twenty years
Assume a €10,000 position in a REIT fund with a 4% distribution yield.
Take the money out and spend it, and you collect €400 a year — €8,000 across twenty years — while still holding €10,000 of shares.
Reinvest it, and the position is worth €21,900 after twenty years: 10,000 × 1.04^20. The difference is €11,900, and it splits cleanly. About €8,000 of it is the cash you chose to spend, and roughly €3,900 is what those distributions earned once they were left to work.
The flat bars are not a loss. They are what you still own after taking the income out, and the gap between the pairs is the price of that income.
Illustrative. €10,000 at a 4% distribution yield with the share price held constant, so the chart isolates the distributions.
There is an inflation problem hiding in the spent version. A €400 distribution that never grows buys, after twenty years of 2% inflation, about what €269 buys today. A distribution that does not rise is a pay cut in installments, which is why the growth rate of the payout matters as much as its starting level.
The borrowing inside the wrapper
A REIT does not buy buildings with your money alone. Most carry debt, typically somewhere between a third and a half of the portfolio value. That borrowing is where the returns are made and where they are lost.
Take €100m of property, €40m of debt and €6m of net operating income. At 4% interest, €1.6m goes to the lender and €4.4m is left for €60m of equity: 7.3%. If refinancing costs 6% instead, the interest bill is €2.4m and the return on equity drops to 6.0%, an 18% cut in what is left for shareholders — caused by two percentage points on the loan, not by a single tenant leaving.
- Property value falls 15%−15%
- Equity falls 25%−25%
| Property value falls 15% | −15% |
|---|---|
| Equity falls 25% | −25% |
€100m of buildings, €40m of debt. The buildings lose €15m, and the whole loss lands on the €60m that belongs to shareholders.
Illustrative. €100m of property, €40m of debt, €6m of net operating income, 4% and 6% interest.
The multiplication runs in both directions, which is the point of the structure — and the risk. Debt does not fall when the buildings do.
A REIT fund and one apartment
Both expose you to property. They differ in almost everything else.
A €300,000 flat with 20% down needs €60,000 of equity, and the purchase costs — property transfer tax, notary, land registry, often an agent — add roughly 10%, so around €90,000 leaves your account before the first tenant arrives. Rent of €1,000 a month looks like a 4% yield on the price. After non-recoverable charges and the occasional empty month, perhaps €800 reaches you. Interest on a €240,000 mortgage at 3.8% is €760 a month. That leaves €40 before a single euro of principal is repaid, in one building, on one street, in one rental market.
| REIT fund | One apartment | |
|---|---|---|
| Entry | one share, often under €100 | around €90,000 in cash |
| Diversification | hundreds of properties, several countries | one building, one tenant market |
| Liquidity | sold in seconds, in part | months, and only as a whole |
| Work | one annual report | tenants, service charges, repairs, a managing agent |
| Borrowing | inside the fund, on the fund's terms | your mortgage, at your rate |
| Income on €90,000 | €3,600 a year at a 4% yield | €40 a month before repayment |
The honest counterweight: a mortgage lets a normal household control a €300,000 asset with €60,000 of its own money, and that is the strongest argument for buying a flat. A REIT fund offers no equivalent — the borrowing happens inside the fund, on its terms, and you do not get to decide when it is refinanced.
The rest of this guide is for members
Navigator members read all 82 guides, including this one, for €9.99/month. The calculators stay free either way.
