REITs explained

Real estate has always been one of the world’s oldest wealth-building tools. But owning property directly can be expensive, time-consuming, and stressful. That’s where Real Estate Investment Trusts (REITs) step in. They let you participate in property markets without dealing with tenants, mortgages, or leaky roofs.

Unlike mutual funds or ETFs that hold stocks and bonds, REITs own income-producing properties — think shopping centres, apartments, warehouses, or even data centres. By law, they must pay out the majority of their income to investors in the form of distributions, which is why they’ve become a staple for income-focused portfolios.

But if you want to get serious about evaluating REITs, here are some of the metrics to watch.

Cap rate: a starting point

The capitalization rate — cap rate — is one way to compare property values. It’s calculated as a property’s annual net operating income divided by its market value.

Example: If a building generates $1 million a year and is valued at $20 million, the cap rate is 5%. A higher cap rate suggests a higher return but usually signals more risk. A lower cap rate can mean a safer, steadier property — but often with less income.

Distribution yield: your cash flow lens

REITs are popular for their regular distributions. The distribution yield tells you how much income you can expect relative to the unit price. Yields aren’t one-size-fits-all: industrial REITs often provide lower yields but steadier long-term growth, while retail-focused REITs may offer higher payouts that swing more with consumer spending.

Think of it this way: a REIT’s cap rate is like looking at the earnings power of its properties, while the distribution yield is what lands in investors’ hands. It’s not unlike how a company can earn profits and then decide how much of those profits to pay out as dividends. The two measures are connected, but not identical — management decisions, debt levels, and expenses can all shift the final payout relative to the properties’ underlying income.

Tax treatment: not all distributions are equal

One subtle point investors sometimes miss: REIT distributions can include different components, such as interest income, dividends, or return of capital. That last one isn’t taxed right away — it reduces your cost base instead. Knowing what portion of your payout falls into each bucket can help you plan for tax time more effectively.

Debt and leverage: reading the fine print

Because REITs own physical property, they often borrow money to finance purchases. Healthy REITs usually show manageable debt-to-assets ratios and strong interest coverage ratios — enough earnings to cover interest payments. Too much leverage can magnify returns in good times, but strain cash flow if rates rise or rental income softens.

Interest rates: the invisible lever

REITs live and die by interest rates more than many other investments. Why? Because they both borrow heavily to buy property and compete directly with fixed income in investors’ portfolios.

Cost of borrowing: When rates rise, REITs may face higher costs to refinance existing debt or take on new loans. That can eat into cash flow and make growth harder. Highly leveraged REITs tend to feel this pain first.
Valuations: Rising rates also make bonds and GICs look more attractive by comparison. Investors may demand higher yields from REITs, pushing unit prices down.
Not all equal: The effect isn’t uniform. Industrial and residential REITs may keep collecting steady rent even in a rising-rate environment, making them more resilient. Retail and office REITs can be more sensitive, since demand for their space is tied to consumer spending and business cycles. Healthcare or data-centre REITs often sit somewhere in between.

Diversification: focused or broad?

Some REITs specialize in one sector, such as healthcare or office space. Others hold a mix of property types. A focused REIT can deliver bigger upside — or downside — if that sector swings. Diversified REITs may smooth out the ride, but returns are often more modest. It comes down to how much risk you want to shoulder.

Liquidity and market behaviour: faster than bricks and mortar

One overlooked feature of REITs is how quickly they trade. Unlike buying or selling a physical property — which can take weeks or months — REIT units listed on an exchange trade daily, just like stocks. That means:

Advantages: Investors can get in and out of real estate exposure quickly, which is useful for rebalancing or raising cash in a hurry.
Trade-offs: The flip side is that REIT prices can swing just as fast as equities, often moving with overall market sentiment. In a broad market selloff, REITs may drop even if the properties they hold remain stable.
Not all REITs are equally liquid: Publicly traded REITs are the most accessible and liquid, but non-traded or private REITs can be much harder to redeem, sometimes with waiting periods or restrictions.

This dual nature — liquid like stocks, backed by hard assets — makes REITs a unique hybrid.

Key takeaways

Sector matters: Industrial, retail, residential, and healthcare REITs each respond differently to economic cycles and interest rates. Understanding the property mix helps you judge potential risks and rewards.
Cash flow vs. growth: High yields can look tempting, but sometimes steadier, lower-yield REITs with long-term growth potential offer better balance.
Metrics are your toolkit: Cap rates, distribution yield, debt ratios, and liquidity don’t predict the future, but they sharpen your comparison skills so you’re not flying blind.
Context counts: REIT performance is tied to more than just property values. Rates, leverage, and investor sentiment all play a role in how these trusts behave in the real world.