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Equity REITs vs. Mortgage REITs


Real Estate Investment Trusts (REITs) offer investors a way to gain exposure to real estate markets without owning physical property. Equity REITs invest directly in income-producing properties, such as shopping malls, office buildings and apartment complexes. They generate revenue primarily through leasing space and collecting rents. Mortgage REITs, on the other hand, invest in real estate loans and mortgage-backed securities. Their income is derived from the interest earned on these financial products. Before making the right investment option for you, consider consulting with a financial advisor.

How a REIT Works

Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-producing real estate across a range of property sectors. Modeled after mutual funds, REITs pool the capital of numerous investors, making it possible for individual investors to earn dividends from real estate investments without having to buy, manage or finance any properties themselves.

REITs can be publicly traded on major exchanges, publicly non-traded, or private. Publicly traded REITs offer high liquidity as their shares are bought and sold on stock exchanges, similar to other publicly traded securities. To qualify as a REIT, a company must adhere to specific regulations, including investing at least 75% of its total assets in real estate and deriving at least 75% of its gross income from real estate-related sources. Additionally, REITs must pay out at least 90% of their taxable income to shareholders in dividends.

Investing in REITs can offer several benefits. They provide a way to invest in large-scale, diversified portfolios of real estate, which might otherwise be inaccessible to individual investors. REITs can also offer attractive total returns based on high, steady dividend income and long-term capital appreciation. Their performance is not highly correlated with the stock market, providing portfolio diversification benefits. Additionally, REITs’ regulatory requirement to distribute the majority of their income as dividends can make them a reliable income stream for investors.

While REITs can be an excellent addition to an investment portfolio, they are not without risks. Market fluctuations, interest rate changes and economic conditions can all impact REIT performance. There are also different types of REITs to understand before investing.

What Are Equity REITs?

Investors reviewing their real estate portfolio.

Equity REITs are companies that own and operate income-generating real estate. Unlike mortgage REITs, which invest in mortgages and mortgage-backed securities, equity REITs focus on acquiring, managing and developing properties. These properties span various sectors, including commercial, residential, industrial and retail real estate. The primary source of income for equity REITs comes from leasing space to tenants and collecting rents, providing a steady stream of revenue that is often distributed to shareholders as dividends.

Investing in equity REITs offers several advantages. They provide diversification within a portfolio, as their performance is generally not highly correlated with the stock market. The dividends paid by equity REITs can offer a reliable income stream, which is especially appealing to income-focused investors. Furthermore, the potential for property value appreciation can contribute to long-term capital gains.

However, like all investments, equity REITs come with risks. Market fluctuations, changes in property values, and economic conditions can impact their performance. Investors must understand these dynamics and consider their own financial goals and risk tolerance when investing in equity REITs.

What Are Mortgage REITs?

Mortgage REITs are companies that provide financing for income-producing real estate by investing in mortgages and mortgage-backed securities. Unlike equity REITs, which own and manage physical properties, mortgage REITs focus on the financial side of real estate. They earn revenue primarily through the interest on the mortgage loans they hold. This type of REIT plays a crucial role in the real estate market by supplying liquidity and funding for both residential and commercial properties.

Investing in mortgage REITs offers potential benefits, such as high dividend yields due to their income-focused business model. They can be an attractive option for investors seeking regular income. However, the risks associated with mortgage REITs should not be overlooked. Their reliance on interest rate spreads makes them vulnerable to fluctuations in interest rates, which can lead to volatile earnings and dividends. Additionally, economic downturns can increase the risk of mortgage defaults, further impacting their financial stability.

Therefore, it is essential for investors to understand these dynamics and consider their own risk tolerance when investing in mortgage REITs. Consulting with a financial advisor can help tailor an investment strategy that aligns with individual financial goals.

Bottom Line

A financial advisor explaining the differences between equity REITs and mortgage REITs.

Both equity REITs and mortgage REITs offer unique opportunities for investors looking to diversify their portfolios and gain exposure to the real estate market. Equity REITs can provide steady income through rental revenues and potential property appreciation, while Mortgage REITs offer attractive dividends driven by interest income from mortgages and mortgage-backed securities. You should also note that both types of investments carry specific risks. Equity REITs are influenced by property market fluctuations and operational challenges, whereas mortgage REITs are sensitive to interest rate changes and credit risks.

Tips for Real Estate Investing

  • A financial advisor can help you make a long-term investment plan and help you decide whether RIETs are a good fit for your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Are you thinking about investing in a property instead of a REIT? Consider using our home affordability calculator to see if it might make sense as an investment.

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