Investors interested in real estate but don’t want the hassle of managing properties often turn to real estate investment trusts (REITs).
REITs allow investors to unlock the real estate market’s potential for income generation and capital appreciation without the complexities associated with direct property ownership.
The two main types of REITs are equity REITs and mortgage REITs.
In this article, we’ll explore the differences between equity REITs and mortgage REITs, and the key considerations for investors.
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Starting simple: What is a REIT?
REITs are companies that own, manage, and finance income-producing real estate.
They generate income primarily through rent from tenants and capital appreciation of the properties they own.
These real estate assets can span a wide array of property types, including:
- Apartment buildings
- Office buildings
- Shopping centers
- Warehouses
- Hotels
- Healthcare facilities
To qualify as a REIT, a company must meet certain regulatory requirements, including:
- At least 75% of the REIT’s assets must be invested in real estate
- REITs must derive at least 75% of their gross income from real estate-related sources
- REITs must distribute at least 90% of their taxable income to shareholders in the form of dividends
Investors can choose to invest in equity REITs, mortgage REITs, or a combination.
What is an equity REIT?
Equity REITs are the most common type of REIT.
They typically focus on direct ownership and management of real estate assets.
To invest in equity REITs, investors purchase shares of a REIT that owns and operates income-producing real estate properties.
They generate income primarily through rent collected from tenants and property appreciation.
They invest in a range of real estate properties across various sectors, including residential, commercial, industrial, and retail.
Equity REIT risks
- Economic downturns affecting property values and rental income
- Fluctuations in interest rates impacting borrowing costs
- Specific risks related to the property sectors in which the REIT invests
Individual equity REITs also may face management or operational challenges that could affect their financial performance.
What is a mortgage REIT?
Mortgage REITs invest in mortgages or mortgage-backed securities, which are collateralized by real estate assets.
Rather than owning physical properties, they focus on providing financing for real estate transactions.
Mortgage REITs earn income primarily from the interest payments on the mortgages they hold or the securities they invest in.
They also generate gains from the sale of mortgages or mortgage-backed securities.
Mortgage REIT risks
- Interest rates
- Borrower default
- Mortgage prepayments
- Liquidity
As with any investment, individuals must weigh the risks with their goals and tolerance.
How to minimize mREIT risks
Some risks are minimized based on the quality of the mortgage REIT.
For example, Marquee Capital Fund 1 limits investor exposure with prudent underwriting and loan screening. Marquee’s team of seasoned mortgage originators ensures that borrowers can afford payments on loans and that the collateralized assets are of value.
What are the key differences between equity REITs and mortgage REITs?
Evaluating the distinct characteristics of each type of REIT helps investors make informed decisions about their investment strategies.
Ownership structure
- Equity REITs: Own and directly manage income-producing real estate properties, maintaining ownership of the physical assets
- Mortgage REITs: Ownership structure revolves around mortgage assets rather than physical properties
Investment objectives
- Equity REITs: Suitable for investors seeking regular income streams, potential capital appreciation, and portfolio diversification through exposure to real estate properties
- Mortgage REITs: Appeals to investors interested in high dividend yields, income generation, and the potential for higher returns through exposure to real estate finance
Asset class focus
- Equity REITs: Focus on investing in and owning a range of real estate properties across various sectors, including residential, commercial, industrial, and retail
- Mortgage REITs: Concentrate on mortgage-related assets, including residential and commercial mortgages, mortgage-backed securities, and other real estate debt instruments
Income generation
- Equity REITs: Generate income primarily through tenant rent collection and property appreciation over time
- Mortgage REITs: Earn income primarily from interest payments received from the mortgages and mortgage-backed securities
Performance
- Equity REITs: May perform well in periods of economic growth and stability, as rising rental income and property values contribute to their total returns
- Mortgage REITs: Offer financial stability due to indirect exposure to the real estate market and low correlation with traditional equity investments
Considerations for investors
Investors must consider the risks, benefits, and rewards of each type of investment before adding it to their portfolio.
Risk tolerance
An investor’s risk tolerance is essentially their ability to endure fluctuations in their investment value.
Risk tolerance is personal to each investor’s strategy and goals.
While equity REITs may be better suited for inventors with an overall lower risk tolerance, mortgage REITs offer higher dividend yields and diversified holdings.
The quality of the mortgage REIT also heavily influences the amount of risk involved.
Market conditions
Different market environments can impact the performance of REIT investments.
Investors should consider current interest rates, economic indicators, and real estate market trends to assess how these conditions may impact their investments today and months/years down the line.
Diversification
While both types of REITs contribute to a more diverse and balanced portfolio, they achieve these ends differently.
- Equity REITs offer diversification benefits by providing exposure to different types of real estate properties.
- Mortgage REITs contribute to portfolio diversification by offering exposure to real estate finance and income-generating assets with different risk-return profiles compared to equity REITs.
They are the superior diversification option for investors interested in real estate finance and income-generating assets beyond physical property ownership.
Benefits of investing in Marquee Capital Fund 1
Investors seeking predictable income, diversified holdings, and exposure to the real estate debt market should consider investing in private mortgage REITs.
Marquee Capital Fund 1 is a mortgage REIT specific to mortgage debt.
The fund is designed to deliver our investors a passive vehicle as an alternative to traditional fixed-income investments.
Your investment is backed by the experience and expertise of the Marquee team, and limits investor exposure through the following approach:
- Prudent underwriting
- Diversification via a pool of mortgage-backed securities
- Investing in a wide array of mortgage products
Marquee Capital Fund 1 provides passive, high-yielding fixed income that outperforms the stock market and offers unique tax benefits.
Get started with Marquee Funding Group and discover how our fund will boost your investment strategy.
