Many different investment types are required to create a balanced and diversified portfolio.
As an investor, your portfolio is likely filled with stocks, fixed income securities, equities, and cash.
But did you know that real estate investment trusts (REITs) are another great way to diversify your portfolio against risk?
Similar to stocks, REITs are bought and sold as shares to investors and pay dividends. However, there are key differences between investing in real estate vs stocks to be aware of.
In the end, it’s ideal to have a blend of both investments, although your portfolio will be subject to your own personal goals and risk levels.
In this article, we’ll briefly explain the difference between investing in real estate vs stocks, and how these compare to investing in real estate investment trusts.
Purchasing Real Estate Vs. Investing in Mortgage Real Estate Investment Trusts (mREITs) Explained
You already know that buying real estate can be a great way to diversify your portfolio and manage wealth. Purchasing houses to fix and flip or to rent out to generate income are solid investment opportunities.
However, this method is an active form of investing. It will require hands-on effort to manage properties — with you acting as a landlord, collecting rent from tenants, and supervising all the responsibilities that come with owning property.
Luckily, there’s an easier option for people looking to make money in real estate — investing in a mortgage real estate investment trust (mREIT).
Mortgage REITs are a passive form of investing. Instead of purchasing properties yourself, you’ll invest your money in a private mortgage fund that uses your money to lend to borrowers.
These short-term hard money loans charge higher interest rates to borrowers who cannot get conventional mortgages due to unique circumstances or complex financial deals. Income generated from interest rates then gets distributed to investors in the form of dividends.
Benefits of Investing in an mREIT
Investing in an mREIT is an easy way for prospective real estate investors to put their money to work for them, and offers many benefits, including:
- Receiving dividends
- No time investment or responsibilities managing properties
- Less work and research
- Increased diversity
The Marquee Capital Fund 1 is beneficial to investors because of its tax benefits, providing high-yielding fixed income while protecting investor capital.
Investor risk is mitigated through borrower equity requirements to offer protection against market volatility.
How Stocks and mREITs Compare to Each Other
REITs, including mREITs, actually share many similarities with stocks, as they both require investors to buy into the company to purchase shares.
For stocks, the capital generated from investors is used to continue making important purchases on the company’s behalf.
For mREITs, the capital generated is used to continue building its portfolio, lending out money to more borrowers, and financing more homes.
Both stocks and REITs offer investors another avenue to diversify their portfolios. Stocks, though more volatile, can potentially add more value quickly to a portfolio, and allow investors personal ownership in companies that they may be passionate about.
REITs are more similar to mutual funds in that they mitigate loss and hedge against inflation.
The Advantages and Disadvantages of Stocks
Investing in the stock market is recommended to diversify any portfolio, however, your personal preferences and risk attitudes will dictate how aggressive or passive your investment strategies are.
Stock investment promises many benefits, including quick liquidity and ease of purchasing shares, but also comes with potential risks, including:
- Stock price volatility and market instability
- Potentially losing your entire investment
- Increased competition against professional traders
- Constant emotional stress and anxiety
However, through diligent research and planning, investors can diversify their investments to lower stock market risks, particularly owning mutual funds.
The Advantages and Disadvantages of REITs
Mortgage REITs are asset-based real estate investments that allow investors to put money into real estate without actually having to purchase or manage properties. Dividends are paid out to investors generated from interest collected on promissory notes and mortgages.
Mortgage REITs work through facilitating asset-based loans secured by physical property.
In the case of borrower default, the mortgage fund company can take back ownership of the property to sell it off to make its money back. To mitigate the risk of borrower default, mREITs typically offer loan-to-value (LTV) ratios of up to 70%, requiring the borrowers to pay a larger down payment.
Unlike certain stock investments, dividends are required of REITs, and must pay at least 90% of taxable income as dividends to their investors.
Mortgage REITs offer investors a more passive approach for generating income, which may be seen as a disadvantage to investors who desire more control over their investments or want a more aggressive portfolio.
Investing in REITs that specialize in only one type of property can be vulnerable to recessions, however, this can be mitigated by investing in an REIT with various property types.
REITs offer investors numerous benefits, including:
- Historically competitive returns and high-yield investments with a target return of 8% to 9.5%
- The fund will elect REIT status to deduct 20% of qualified REIT dividends
- Increased transparency through portfolio reporting tools
- Non-correlated to the stock market
- No management responsibility
- Borrower equity requirements offer protection against market volatility
Get Started Investing at Marquee Funding Group
Marquee Funding Group is a full-service mortgage banking firm specializing in hard money private equity loans across California and Colorado.
Marquee funds various types of loans across the consumer and commercial marketplace, helping people who have difficulty getting conventional loans through banks and credit unions.
We also offer investors an easier, alternative route to real estate investing with our Marquee Capital Fund 1.
The Marquee Capital Fund 1 is not only an excellent alternative to physically managing and maintaining properties and traditional fixed-income investments, but it also provides high-yielding fixed income while protecting the investor’s capital with an 8% preferred return.
To protect investor capital, all our loans are carefully screened and underwritten by licensed professionals to ensure the borrower’s financials and ability to repay.