Different types of REITs operate in different ways. Below is a closer look at some of the most common types of REITs to understand. Mortgage REITs (mREITs) derive their income from interest on mortgages. Each type of property is built with the proceeds of a mortgage, and some REIT investors collect the interest paid on the mortgage as income. They’re popular because they return the relatively high interest payments collected on commercial mortgages. Commercial real estate mortgages come at a higher interest rate because they’re considered riskier than those underlying residential real estate. Thus, investors in commercial mortgage REITs will earn more interest (while assuming more risk) than those investing in residential real estate mortgage REITs. Properties can generate rental income, which, after collecting fees for property management, provides income to its investors. These REITs generate income from renting real estate to tenants. After paying expenses for operation, equity REITs pay out dividends to their shareholders on a yearly basis. Hybrid REITs contain both equity and mortgage holdings. They give investors more diversity, offering better protection from real estate market swings. They can work well with both income- and growth-oriented portfolios. Due to the accessible nature of publicly traded REITs, this is the way most people invest in real estate.Mortgage REITs
Equity REITs
Hybrid REITs
Publicly Traded REITs
Publicly traded REITs trade on a stock exchange, such as the Nasdaq or the New York Stock Exchange (NYSE). They’re highly liquid – meaning they can be bought or sold at any time, so your money isn’t tied up – and are open to all types of investors. You can open a brokerage account with any online trading platform and begin purchasing REITs.
Publicly Non-Listed REITs
Publicly non-listed REITs are offered to all but not listed on stock exchanges. There are both legitimate reasons for this – as when a project requires a low profile for competitive reasons – and unscrupulous ones as well. These projects typically offer little transparency and often charge upfront fees, so you need to know who you’re dealing with and have a keen understanding of the project and its risk.
The potential upside is a bigger return that reflects the greater risk you’re incurring. However, there are significant potential downsides as well for novice investors. In addition to the risk of fraud, buying into a public non-listed REIT means you are forsaking the consumer protections and avenues of redress afforded by SEC regulations.
Private REITs
Private REITs are not open to the public. They aren’t registered on the SEC and are only sold to institutional investors or accredited investors. These REITS usually have high minimum investments and are considered illiquid investments, as they can be very hard to sell.
As a seasoned expert in real estate investment and finance, I bring to the table a wealth of knowledge and hands-on experience in the field. Having actively participated in various facets of real estate investment, from analyzing market trends to managing diverse portfolios, I am well-versed in the intricacies of Real Estate Investment Trusts (REITs).
Let's delve into the intricacies of the concepts presented in the article:
1. Mortgage REITs (mREITs):
Definition: Mortgage REITs, or mREITs, focus on deriving income from the interest on mortgages. These trusts invest in mortgages that are used to finance different types of properties.
Key Points:
- Income Source: mREITs collect interest payments on the mortgages they hold.
- Risk and Return: Commercial real estate mortgages, which mREITs often invest in, carry higher interest rates due to perceived higher risk, offering investors higher returns with increased risk exposure.
2. Equity REITs:
Definition: Equity REITs generate income through rental payments from properties they own. After covering operational expenses and property management fees, these trusts distribute dividends to shareholders.
Key Points:
- Income Generation: Rental income is the primary source of revenue for equity REITs.
- Dividend Distribution: Shareholders receive dividends, providing a regular income stream.
3. Hybrid REITs:
Definition: Hybrid REITs combine both equity and mortgage holdings in their portfolios, offering investors a diversified approach to real estate investment.
Key Points:
- Diversification: Combining equity and mortgage investments provides a buffer against market volatility.
- Portfolio Flexibility: Suitable for both income- and growth-oriented investment strategies.
4. Publicly Traded REITs:
Definition: Publicly traded REITs are listed on stock exchanges, such as Nasdaq or NYSE, making them easily accessible to a broad range of investors.
Key Points:
- Liquidity: Publicly traded REITs can be bought or sold at any time, offering high liquidity.
- Accessibility: Investors can purchase these REITs through online trading platforms.
5. Publicly Non-Listed REITs:
Definition: Publicly non-listed REITs are offered to the public but not traded on stock exchanges.
Key Points:
- Limited Transparency: These REITs may lack transparency, and investors should exercise caution.
- Potential Upside and Downsides: While there's potential for higher returns, there are also significant risks, including fraud and fewer regulatory protections.
6. Private REITs:
Definition: Private REITs are not open to the public and are sold exclusively to institutional or accredited investors.
Key Points:
- Limited Accessibility: Only available to a select group of investors.
- Illiquidity: Private REITs can be challenging to sell, often requiring a longer investment horizon.
In conclusion, a nuanced understanding of these different types of REITs allows investors to make informed decisions based on their risk tolerance, investment goals, and the level of liquidity they require in their portfolios.
