Step 1: Investors buy shares or units

• You and other investors buy shares in a REIT on a stock exchange (for example, the London Stock Exchange in the UK), the same way you would buy any other listed company.
• The cash paid for those shares becomes capital that the REIT can use to acquire, develop, or refinance its portfolio of properties or real‑estate loans.

Step 2: The REIT invests in real estate or real estate finance

• Equity REITs use this capital (often alongside bank debt or bonds) to buy and manage income‑producing properties such as offices, warehouses, logistics centres, flats, healthcare facilities, retail parks, or data centres.
• Mortgage REITs take a different approach: instead of owning buildings, they buy or originate mortgages and mortgage‑backed securities, earning interest income rather than rent.

Step 3: Tenants or borrowers make payments

• In an equity REIT, tenants sign leases and pay rent, service charges, and sometimes turnover‑linked payments; this recurring rent is the REIT’s core operating income.
• In a mortgage REIT, borrowers make scheduled interest and principal payments on the mortgages or mortgage‑backed securities held by the REIT, which forms its core revenue stream.

Step 4: The REIT pays expenses and interest

• From this income, the REIT pays property‑level costs: maintenance, repairs, utilities (where relevant), insurance, property management, and local property taxes.
• It also pays corporate‑level costs, such as staff salaries, head‑office overheads, asset‑management fees (if externally managed), and interest on any debt used to finance the portfolio.

Step 5: Net income is mostly paid out as dividends

• After operating expenses, interest, and taxes on any non‑exempt income, the REIT is left with taxable income from its property activities.
• To maintain REIT status, it must distribute the majority of that taxable income (commonly at least about 90%) to shareholders each year in the form of dividends, which makes REITs naturally income‑oriented.

Step 6: Your return as an investor

• You receive regular cash dividends, usually quarterly or semi‑annually, in proportion to how many REIT shares you hold; those dividends reflect the underlying rental or interest income after costs.
• At the same time, the REIT’s share price moves with expectations about property values, rental growth, vacancy rates, leverage, and interest rates, so your total return is “dividends plus or minus capital movement” over time.

If you want to go one notch deeper next, we can walk through a numerical mini‑example (e.g., “REIT owns three warehouses, here are the rents, costs, leverage, and the dividend that falls out at the end”).