What Are the Pros and Cons of Owning an Equity REIT vs. a Mortgage REIT?

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What Are the Pros and Cons of Owning an Equity REIT vs. a Mortgage REIT?

Equity vs. Mortgage REITs: An Overview

Real estate investment trusts (REITs) come in a variety of forms, including equity REITs, mortgage REITs, and hybrid REITs. In a REIT, the corporation owns and typically manages real estate or assets with a real estate-related purpose. REITs trade on significant trading exchanges and are comparable to equities.

Companies may purchase real estate or mortgages via REITs by pooling investor funds. With this sort of investment, both big and little investors may buy real estate.

Equity REIT income are distributed to investors as dividends at a high rate. Equity REITs often perform better during periods of low interest rates and growing real estate values. However, there are virtually always opportunities available because to the complexity of the several markets that equities REITs cover.

Key Takeaways

  • REITs are instruments that resemble shares and provide both big and small investors the opportunity to buy real estate.
  • Real estate acquisition, management, construction, remodeling, and sales are the responsibility of equity REITs.
  • Mortgage REITs often provide financing to homebuyers, purchase existing mortgages, or make investments in mortgage-backed securities (MBS).

Equity REITs

Equity REITs make investments in tangible real estate. The primary source of income for equity real estate investment trusts is rental income from their real estate properties. Equity REITs often invest in commercial, industrial, residential, retail, and hospitality and leisure assets.

Diversified Healthcare Trust is an example of an equity REIT (DHC).Equity REITs make money through renting out their properties as well as by purchasing inexpensive real estate and reselling it at a profit. Some equity REITs are diversified and make investments in a variety of real estate types, including apartments and retail spaces.

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A diversified REIT is one like the Kilroy Realty REIT (KRC). Other REITs, like CBL & Associates Properties Inc. REIT (CBL), or hotels, like Sotherly Hotels Inc., concentrate on more specific areas of the real estate industry (SOHO).

Mortgage REITs

Less than 10% of all REITs are mortgage REITs, which invest only in mortgages. Mortgage REITs mostly make money from the interest generated on their mortgage loans, as opposed to equity REITs, which normally make money through renting out real estate.

The Apartment Investment and Management Company REIT is an example of a mortgage REIT (AIV).By charging interest on money leased to borrowers to support the acquisition of real estate, REITs like AIV make money. Additionally, they deal and finance mortgage-backed securities. There are residential mortgage REITs like the Anworth Mortgage Asset Corporation REIT as well as commercial mortgage REITs like the Capstead Mortgage Corporation REIT (CMO) (ANH).Some mixed REITs invest in both commercial and residential REITs, as Dynex Capital Inc. REIT (DX).

The bulk of mortgage REIT revenues are distributed to investors as dividends, similar to equities REITs. Mortgage REITs often perform better when interest rates are increasing. But much like equities REITs, mortgage REITs typically always have investment possibilities accessible due to the wide variety of target markets.

Hybrid REITs

Mortgages and real estate are both investments for hybrid REITs. The Two Harbors Investment Corp. REIT (TWO) is one of the few REITs that really engages in both forms of commercial activities. Two Harbors makes investments in residential real estate, residential mortgage loans, and residential mortgage-backed securities.

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Hybrid REITs like Two Harbors adopt a more balanced approach by investing in both mortgages and hard assets, which may allow them to prosper in both rising and declining interest-rate conditions where classic stock only or mortgage only REITs might fail.

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