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SmartAsset: What Is a Hybrid REIT?

Investors often look to real estate to diversify their portfolios and mitigate risk. However, many investors don’t want the responsibility or risk of owning individual real estate properties. REITs are a way to buy real estate to get the benefits of ownership without the headaches of managing properties. There are many different types of REITs available to investors, including a hybrid REIT that invest in both mortgage and equity investments. Let’s break down what a REIT is, the types of REITs available and if you should invest in a hybrid REIT.

A financial advisor can help you create a financial plan for your real estate investment goals.

What Is a REIT?

Real estate investment trusts (REITs) allow investors to own fractional interests in a portfolio of properties, similar to stock ownership in a mutual fund. REITs provide recurring income and professional management without the responsibilities of owning individual properties.

REITs enjoy special tax treatment, which allows them to avoid taxation if they pass at least 90% of taxable income to investors. However, the downside is that REIT distributions are treated as ordinary income for tax purposes. For this reason, many investors prefer to own REITs in tax-deferred accounts.

Types of REITs

There are many different types for investors to choose from. Many specialize in specific industries or types of properties, which allows investors to niche down their investments based on their portfolio and investing strategy.

Generally, there are three types of REITs:

  • Mortgage REITs. Does not own physical assets. Instead, it originates or purchases mortgages or mortgage-backed securities (MBS).
  • Equity REITs. Build, develop, repair, or manage investment properties.
  • Hybrid REITs. Invests in both mortgage and equity investments.

7 Common REIT niches

Beyond these three broad categories, REITs often niche down into specific types of properties or geographic regions based on their specialties and management expertise. A sample of the niches that REITs invest in includes the following categories:

What Is a Hybrid REIT?

SmartAsset: What Is a Hybrid REIT?

A hybrid REIT is a real estate investment trust that invests in properties and mortgage REITs. This diversified strategy aims to minimize risk while providing flexibility for REIT managers.

Investors choose this option when they are unsure of the type of REIT they want to invest in. Or if they want the REIT manager to have the freedom to change the REIT’s portfolio based on changing economics, property values, and interest rates.

Should You Invest in a Hybrid REIT?

The decision to invest in a hybrid REIT depends on your portfolio and investment strategy. For some investors, owning a single REIT that has the power to invest in both mortgage and equity investments is appealing. It removes some of the investor decision-making and places trust in the fund managers to select to best investments to meet its objectives. The downside is that you have less control over what the fund invests in and how it fits within your portfolio.

Some investors prefer mortgage or equity REITs so that they have more control over what that fund invests in. This strategy seeks to minimize scope creep and avoid concentration in sectors without your knowledge.

Bottom Line

SmartAsset: What Is a Hybrid REIT?

Hybrid REITs are funds that invest in both mortgage and equity investments. They allow investors to invest in one fund that has the flexibility to adjust its holdings based on current economic trends and management expertise. However, changes in the fund’s holdings may change without warning and lead to concentration in your portfolio. The best option is to speak with a financial advisor to discuss how a hybrid REIT fits in your investing strategy and what options are available for you.

Tips for Real Estate Investing

  • A financial advisor can help you determine which type of REIT best fits into your financial plan. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Real estate assets can provide meaningful income for your retirement portfolio. Our retirement calculator estimates how much income you’ll need when you quit working. Enter your state, age, savings rate, and more to forecast how much income you’ll need to retire.

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