How Does a REIT Make Money? Passive Income Through Real Estate Simplified
For investors in the Lake Minnetonka region and elsewhere, REITs (Real Estate Investment Trusts) present an alluring option for diversifying your portfolio and generating passive income, particularly for those looking into real estate outside of direct house ownership. However, how precisely can one profit from a REIT?
What Is a REIT?
Real estate investment trusts, or REITs for short, are businesses that own, manage, or finance real estate that generates income. Imagine purchasing stock in a business that possesses real estate rather than goods or services.
REITs pool investor money to buy and manage real estate like:
- Apartment buildings
- Shopping malls
- Office complexes
- Warehouses
- Hotels
- Data centers
- Healthcare facilities
Types of REITs:
| Type | Focus |
| Equity REITs | Own and manage properties |
| Mortgage REITs (mREITs) | Invest in real estate debt (loans/mortgages) |
| Hybrid REITs | Combine property ownership and mortgage investments |
How Does a REIT Make Money?
A REIT generates revenue in two primary ways:
Lease revenue or rental income:
Whether they are tenants in a residential complex or retail establishments in a mall, the majority of REITs hold real estate that is leased to tenants. Dividends from that consistent cash flow are given to shareholders.
Appreciation of Capital:
The REIT’s portfolio gains value as real estate values increase. You make money from capital gains if you sell your shares for more than you paid for them.
Interest income from mortgages (for mREITs):
By making loans for the acquisition of real estate and collecting interest, mortgage REITs make money.
How Do You Make Money on a REIT?
Dividends:
REITs are required by law to give shareholders at least 90% of their taxable income. This entails regular dividend payments on a quarterly or monthly basis, which might provide higher yields than conventional equities.
Share Price Growth:
The share price of the REIT may rise if the trust grows financially or if the value of its properties increases. Your REIT shares may fetch a higher price when you sell them.
Example: REIT Earnings Potential
| Scenario | Outcome |
| You invest $10,000 in a REIT with a 6% yield | You receive $600/year in dividends |
| After 3 years, the share value rises 15% | You gain $1,500 in capital appreciation |
| Total Return Over 3 Years | $2,300 (23% ROI or ~7.7% per year) |
Why Real Estate Investors Love REITs:
REITs provide the following benefits, particularly for those who are already invested in real estate (such as Excelsior Real Estate buyers):
- Diversification into commercial or industrial real estate
- Passive income without being a landlord
- Liquidity (easy purchasing and selling of publicly traded REITs)
- Tax advantages via depreciation and dividend income
Risks to Know Before You Invest
| Risk | What to Watch |
| Market Volatility | REIT share prices can fluctuate with the stock market |
| Interest Rate Sensitivity | Rising rates can hurt REIT performance and payouts |
| Property Sector Risk | Retail REITs may struggle during economic downturns |
| Fees & Taxes | Some REITs have high management fees or unfavorable tax treatment |
How to Invest in a Real Estate Investment Trust
You don’t need to be a millionaire to get started. Here’s how:
Publicly Traded REITs:
- Buy them like stocks through any brokerage (e.g., Charles Schwab, Fidelity, Robinhood)
- Low barriers to entry
REIT Mutual Funds or ETFs:
- Diversify instantly with multiple REITs in one investment
- Available through major fund providers like Vanguard or BlackRock
Private REITs:
- Higher minimums, less liquidity
- Often limited to accredited investors
Is Investing in a REIT Right for You?
For high-net-worth individuals, busy professionals, and retirees—especially in communities like Excelsior and Wayzata—REITs can offer:
- Stable passive income
- Hands-free real estate exposure
- Portfolio diversification without managing tenants or toilets
Whether you’re selling a lakefront home or planning your financial future, adding a REIT to your investment strategy could complement your existing real estate assets.
Final Thoughts
By investing wisely in a well-managed trust, you can earn steady dividends, benefit from property value growth, and enjoy the perks of real estate without the hassle of direct ownership.
As a smart investor, REITs give you the flexibility to stay in the market—without staying up at night managing properties.
Whether you’re looking to grow your passive income, balance your real estate holdings, or explore new investment channels, our team can help you understand how REITs fit into your financial strategy.
Contact Excelsior Real Estate today to schedule a no-obligation consultation—and take one smart step closer to a stronger, more diversified future.