There are two distinct types of real estate investmeꦡnt trusts (REITs) that individual investors can consider if they want to invest in this sector:

• An equity REIT, the most common type, is an investment in a company that buys, builds, renovates, manages, and sells income-producing real estate. The company's income is derived primarily from rents paid by its tenants.
• A mortgage REIT purchases or originates mortgages and mortgage-backed securities (MBS). The income from a mortgage REIT is derived from the interest payments made on the mortgages.

What Is a REIT?

Real estate investment trusts are a type of security that can be bought and sold, like stocks, on the major stock exchanges. Both are investments in real estate butಌ their approaches are very different.

Equity REITs directly own and operate rental properties, making their money from rents paid෴ by their tenants. Mortgage REITs buy or originate mortgages, making money from the interest payments.

REITs sell shares to investors to raise money to expand their busin✤esses, whether the focus is on buying real estate or bౠuying mortgages. Investors buy the shares to make money in this major business sector without the far greater commitment of time and money that is required of direct participants in real estate.

REIT Regulation

REITs are generally required to have at least 100 investors. Additional regulations prevent a small number of investors from owning and controlling a majority interest in the REIT.

At least 75% of a REIT’s assets must be in real estate, and at least 75% of its gross income must be derived from rents, mortgage interest, or gains from the sale of property.

REITs are required by law to pay out at least 90% of the company's annual taxable income (excluding capital gains) to their shareholders as dividends. This restriction ensures investors get a fair share of the profits but limits a REIT’s ability to reinvest cash flow for growth purposes.

Equity REITs

Equity real estate investment trusts are the best-known type of REIT. Their revenues are mainly generated through renta🤪l payments on their real estate holdings. The companies acquire, manage, build, renovate, and s👍ell income-producing real estate.

An equity REIT may invest broadly o𒆙r may focus on a particular segment such as shopping centers, residential complexes, or healthcarꦦe facilities.

In general, equity REITs provide stable income🥃. And because these REITs generate revenue by collecting rents, their income is relatively easy to forecast and tends to increase over time.

Mortgage REITs

澳洲幸运5官方开奖结果体彩网:Mortgage REITs—also called mREITs—invest in mortgages, 澳洲幸运5官方开奖结果体彩网:mortgage-backed securities (MBS), and related assets. While equity REITs generate revenue through rents, mortg🥀age REITs earn income from the interest payments o♕n mortgages.

For example, assume company ABC qualifies as a REIT. It buys an office building with the funds🤪 generated from investors and rents out office space. Company ABC owns and manages the property and collects monthly rents from its tenants. Company ABC is thus🏅 considered an equity REIT.

Company XYZ also qualifies as a REIT. It lends money to a real estate developer. Unlike company ABC, company XYZ generates income from the interest earned on the loan. Company XYZ is t✅hus a mortgage REIT.

Like equity REITs, the majority of mortgage REIT profits are paid to investors as divওi𓄧dends.

Mortgag🌄e REITs tend to do better than equity REITs when interest rates are risingꦜ.

Risks of Equity and Mortgage REITs

Like all inve🎉stments, equity REITs and mortgage REITs have risks. Here are a few that investors should be aware of:

• Equity REITs tend to be cyclical, making them sensitive to recessions and periods of economic decline.
• Too much supply—for example, more hotel rooms than a market can support—can lead to higher vacancies and lower rental income for equity REITs.
• Mortgage REITs are vulnerable to changes in interest rates. Lower interest rates lead more borrowers to refinance or repay their mortgages, forcing the REIT to reinvest at a lower rate.
• Most mortgage securities that REITs buy are backed by the federal government, which limits the credit risk. However, certain mREITs may be exposed to higher credit risk, depending on the specific investments.

The Bottom Line

REITs give investors a way to tap into the real estate market with the substantial investment in time and money required to own, operate,🎃 and finance properties themselves.

Both equity and mortgage REITs are required to pay out 90% of their income to shareholders in the form of dividends.

In general, equity REITs may be attractive to buy-and-hold investors looking for a combinꦜation of growth and income. Mortgage REITs, on the other hand, may be better suited for risk-tolerant investors looking for maximum income without much focus on capital appreciation.