🎯 In 30 seconds: You can own real estate through a REIT fund in a few clicks, by buying and running a rental property, or through online crowdfunding deals. They differ hugely in effort, cash needed, how easily you can sell and how much can go wrong. A rental is a small business. A REIT fund is a stock fund. Crowdfunding sits in between and is the hardest to get out of.
Path 1: REITs
A real estate investment trust is a company that owns, and usually runs, income-producing property such as apartments, warehouses, offices or cell towers. To keep its special tax status a REIT must pay out at least 90% of its taxable income to shareholders each year, which is why REIT yields tend to be high. The SEC splits them into two kinds that behave very differently:
| Publicly traded REIT (or REIT fund) | Non-traded REIT | |
|---|---|---|
| Selling | Any trading day, like a stock | No market; limited redemption programs that can be suspended |
| Up-front costs | Normal trading cost | Typically 9% to 10% of what you invest, per the SEC |
| Minimum | One share | Typically $1,000 to $2,500 |
| Price | Real-time market price | No independent price; an estimate may come later |
A REIT index fund holds dozens of these at once, which is how most individuals own them. REIT prices move with the stock market and also with interest rates.
Taxes. Most REIT dividends are not “qualified,” so in a taxable account they are taxed as ordinary income. Some of that can be reduced by the Section 199A deduction, which the July 2025 tax law made permanent. Many people hold REIT funds in an IRA or 401(k) to avoid the yearly tax. See How investments are taxed.
Path 2: a rental property, by the numbers
Dana buys a $300,000 house to rent out. She puts 25% down and borrows the rest on a 30-year mortgage at an example rate of 6.5%.
| Cash in: down payment + closing costs (example) | $75,000 + $9,000 = $84,000 |
| Mortgage payment (principal + interest) | About $1,422 a month, $17,066 a year |
| Rent: $2,300 a month | $27,600 a year |
| Vacancy allowance, 5% | −$1,380 |
| Property manager, 8% of rent collected | −$2,098 |
| Property tax | −$3,600 |
| Insurance | −$1,800 |
| Repairs and upkeep, about 1% of value | −$3,000 |
| Net operating income (before the mortgage) | $15,722 |
| Cap rate: income ÷ price | About 5.2% |
| Cash flow after the mortgage | About −$1,343 a year |
On these numbers Dana pays about $112 a month out of pocket to own the place. She still builds equity, because about $2,515 of the first year’s payments go to principal, and the house may rise in value. But many first-time landlords count only rent minus mortgage and forget vacancy, repairs and management. That shortcut would have shown her a profit of over $500 a month.
Rental tax basics
- Depreciation: the IRS lets you deduct the building’s cost (not the land) over 27.5 years for residential rentals. If $240,000 of Dana’s price is the building, that is about $8,727 a year on paper, even though no cash leaves.
- Losses: rental losses are generally passive. If you actively take part in managing the rental, up to $25,000 of losses a year can offset other income, phasing out between $100,000 and $150,000 of modified AGI.
- Selling: depreciation you took is partly taxed back when you sell. A tax professional is worth it for the first year of owning a rental.
Path 3: real estate crowdfunding
Online platforms let you put smaller amounts into a single building or a loan on one. Deals open to everyone usually run under the SEC’s Regulation Crowdfunding, which caps how much non-accredited investors can put in across all such deals in 12 months:
| Your situation | Limit over 12 months |
|---|---|
| Income or net worth below $124,000 | The greater of $2,500 or 5% of the greater of your income or net worth |
| Both income and net worth at or above $124,000 | 10% of the greater of the two, up to $124,000 |
Securities bought this way generally cannot be resold for a year, and in practice there is often no buyer for much longer. Other deals are limited to accredited investors.
- Read the offering document: who runs it, how they are paid, how much debt the property carries and when you can get money back.
- Expect to be locked in for years.
- Spread small amounts across deals instead of one large bet, if you do it at all.
Choosing a path
| REIT fund | Own a rental | Crowdfunding | |
|---|---|---|---|
| Cash to start | One share | Tens of thousands | Often hundreds to a few thousand |
| Work | None | Ongoing, or pay a manager | Reading documents |
| Selling | Any day | Months, with high costs | Often years |
| Diversified | Yes | No: one building | Usually no |
- What share of taxable income must a REIT pay out to keep its status? Answer: At least 90%.
- In Dana’s example, why is cash flow negative even though rent exceeds the mortgage? Answer: Vacancy, management, taxes, insurance and repairs take about $11,900 a year before the mortgage.
- Over how many years is a residential rental building depreciated? Answer: 27.5 years.
- How long are Regulation Crowdfunding securities generally locked from resale? Answer: One year.