Short answer: a REIT is the wrong tool in seven situations: when the money is inside a 1031 exchange, when you have $1 million or more in a taxable account and a high tax bracket, when you are likely to sell after a price drop, when you are buying a yield above 10 percent for income, when you want real estate but are buying a mortgage REIT, when you need liquidity from a non-traded REIT, and when you want income from a REIT priced for growth. For most other investors, and for nearly everyone with less than $250,000, a well-graded REIT is still the simplest way to own commercial real estate.
This site grades REITs, so it may seem odd to publish a page about when not to buy one. But a grade answers whether a REIT is durable, not whether it is the right vehicle for your money. The structure that makes REITs excellent for most investors, a liquid, diversified, tax-advantaged company that must pay out 90 percent of its taxable income, is also what makes them the wrong choice in a handful of specific cases. Knowing those cases is part of using the grades well.
1. Your money is inside a 1031 exchange
Section 1031 lets an investor defer the gain on the sale of investment real estate by buying replacement real property within 45 days (identification) and 180 days (closing). REIT shares are securities, not real property, so they cannot be replacement property. An investor who sells an apartment building and buys Realty Income shares with the proceeds has not completed an exchange; the full gain, including depreciation recapture, is taxable that year.
The alternatives are direct replacement property (often a single-tenant net lease building leased to the same kinds of tenants the net lease REITs own), a Delaware Statutory Trust interest, or, later, a contribution into a REIT’s operating partnership under Section 721. Each has tradeoffs; the 721 route in particular converts a building into partnership units whose redemption is taxable. 721 UPREIT vs direct 1031 replacement property walks through them.
2. You have $1 million or more in a taxable account
REIT dividends are mostly taxed as ordinary income. The 20 percent Section 199A deduction, made permanent in 2025, brings the top federal rate to 29.6 percent, plus 3.8 percent net investment income tax. A direct owner of the same kind of building collects rent instead, and deducts depreciation on the building, which a cost segregation study and 100 percent bonus depreciation can accelerate into the first year.
The difference is large enough to matter at seven figures. On $2 million, Realty Income’s 5.9 percent dividend yields about $78,000 after federal tax, while a comparable net lease property bought at a 6.75 percent cap rate yields about $95,000 with straight-line depreciation and can be fully sheltered in year one with cost segregation. Direct ownership brings concentration, illiquidity and depreciation recapture on a taxable sale, so it is not a free upgrade, but for an investor with the capital and the tax bill, the REIT leaves money on the table. The full worked example is in Realty Income vs owning its buildings.
The flip side is the most useful rule on this page: REITs belong in tax-advantaged accounts. Inside an IRA or 401(k), the ordinary-income treatment of REIT dividends stops mattering, and depreciation from direct property would be worthless anyway. Many investors hold REITs in retirement accounts and direct real estate in taxable ones for exactly this reason.
3. You are likely to sell after a price drop
REIT shares trade every second the market is open, and they move with interest rates. The 10-year Treasury rose from 4.19 percent on January 2 to 5.18 percent on September 24, 2026, and REIT prices fell in weeks when yields jumped even though rent collections across the sector held up and Nareit reported record industry funds from operations for the second quarter. Private real estate reprices too, but slowly and out of sight.
That visibility is a feature for disciplined investors and a trap for everyone else. An investor who sold net lease REITs in a rate scare locked in a loss on a portfolio whose rent never stopped arriving. If a 20 percent drawdown in a year of steady fundamentals would make you sell, a REIT’s liquidity works against you, and an illiquid asset whose value you only see at sale may produce better behavior and better results.
4. You are buying a double-digit yield for income
High yields in REITs are almost always a warning. Of the 32 listed REITs yielding 10 percent or more in September 2026, none earns a B grade or better on our methodology, and half are graded D. Nine REITs cut their dividends in 2026, three stopped paying and four are liquidating; nearly all had already graded below 60. The REIT dividend safety page lists every one.
If the goal is income that survives, the practical range for equity REITs is roughly 4 to 7 percent, where the market is pricing real estate risk rather than credit risk. Above about 8 percent for an equity REIT or 12 percent for a mortgage REIT, the yield usually reflects doubt that the dividend will last.
5. You want real estate but are buying a mortgage REIT
Mortgage REITs own loans and mortgage-backed securities, not buildings. Their dividends depend on interest spreads, leverage and credit losses, and their book values can fall quickly when rates move or borrowers default. Our ranking grades 32 of them; they average a score of 51, the lowest of any sector, and they account for six of the nine dividend cuts in 2026 (Arbor, Franklin BSP, KKR Real Estate Finance, Ready Capital, AFC Gamma and Orchid Island), while Apollo Commercial Real Estate Finance adopted a plan of liquidation.
Mortgage REITs can have a place in an income portfolio, but they are a leveraged credit investment. An investor who wants the inflation protection and rent escalators of property should own equity REITs or property itself. See the mortgage REIT ranking for the sector’s full grade distribution.
6. You need liquidity and are looking at a non-traded REIT
Non-traded REITs do not list on an exchange. Investors get their money back through the REIT’s own redemption program, which is typically capped at a small percentage of net asset value per month or quarter. When many investors want out at once, the caps bind: shareholders of some of the largest non-traded REITs had redemption requests limited through 2022 and 2023. Non-traded REITs can also carry higher fees than listed ones.
They can suit investors who value a smoother reported value and can wait for their money. They do not suit anyone who may need the cash on short notice. Our non-traded REIT coverage explains how to read their net asset values and redemption terms.
7. You want income from a REIT priced for growth
Some of the best REITs in the market are poor income investments at today’s prices. Welltower, the highest-graded REIT we cover at 88, yields about 1.5 percent, and Equinix yields about 2.1 percent. The market is paying for senior housing and data center growth, not for the dividend. An income investor who buys them for yield will be disappointed by the check even if the company performs well; an investor who wants growth should buy them for growth.
For current income backed by a strong grade, the better fits are names such as Realty Income (87, 5.9 percent), Agree Realty (86, 4.8 percent), NNN REIT (79, 6.0 percent) and VICI Properties (82, 7.8 percent). The highest yields that still grade B or better are listed live on the dividend safety page.
When a REIT is exactly the right tool
None of this is an argument against REITs. For an investor with a few hundred dollars to about $250,000, a well-graded REIT offers something no private investment can: ownership of thousands of properties, professional management, audited reporting and the ability to sell in seconds. Inside a retirement account, the tax disadvantage disappears. For investors who want diversification rather than a bet on one tenant, or who have no interest in underwriting leases and buildings, the REIT is the better vehicle at any size.
| Situation | Better choice | Why |
|---|---|---|
| Under about $250,000 | Well-graded REIT | Diversification and liquidity; direct property is not practical |
| IRA or 401(k) money | REIT | Ordinary-income treatment no longer matters |
| Inside a 1031 exchange | Direct property or DST | REIT shares are not real property |
| $1 million or more, taxable account, high bracket | Often direct NNN | Depreciation and 1031 path |
| Need cash on short notice | Listed REIT | Daily liquidity; avoid non-traded REITs |
| Want income, not growth | REITs graded B or better yielding 4% to 7% | Covered payouts; avoid double-digit yields |
| Want property exposure | Equity REIT | Mortgage REITs are leveraged credit, not buildings |
Frequently Asked Questions
When should you not invest in REITs?
When the money is inside a 1031 exchange (REIT shares are not eligible replacement property), when you have $1 million or more in a taxable account and would benefit from depreciation on directly owned property, when you would sell after a price drop, when you are chasing yields above 10 percent, when you want real estate but are buying mortgage REITs, when you need liquidity from a non-traded REIT, and when you want income from a low-yielding REIT priced for growth.
Can you use a 1031 exchange to buy REITs?
No. Section 1031 applies only to real property, and REIT shares are securities. A seller in a 1031 exchange must buy replacement real property, such as a directly owned net lease building, or a qualifying interest such as a Delaware Statutory Trust. Contributing property to a REIT’s operating partnership under Section 721 is a separate transaction, and redeeming the resulting units is generally taxable.
Should REITs be held in an IRA or a taxable account?
REITs are generally better held in an IRA, 401(k) or other tax-advantaged account, because most REIT dividends are taxed as ordinary income rather than at the lower qualified dividend rate. Inside a tax-advantaged account that difference disappears. Directly owned property, whose depreciation shelters rent from tax, generally belongs in a taxable account.
Are high-yield REITs a good investment?
Usually not for income. None of the 32 listed REITs yielding 10 percent or more in September 2026 earns a B grade or better, and half are graded D. Most double-digit yields come from mortgage REITs or from equity REITs whose share prices have fallen because investors expect a cut. The strongest REITs typically yield between about 4 and 7 percent.
Is it better to buy a REIT or a rental property?
Below about $250,000, a REIT is usually better: it is diversified, liquid and requires no management. Above about $1 million, especially for an investor in a high tax bracket or inside a 1031 exchange, owning a triple net property directly often produces more after-tax income because the owner collects the full rent and claims depreciation. The tradeoff is concentration in one tenant and illiquidity.
Data as of September 25, 2026 from the REIT Rankings database; grades follow the published methodology. Treasury yield from FRED (DGS10). Industry FFO from Nareit. Tax figures are federal, simplified and illustrative. This page is research, not investment or tax advice.