The majority of REITs operate as equity REITs, allowing investors to invest in income-producing real estate holdings. These businesses own and lease properties in a variety of real estate sectors, including office buildings, shopping malls, residential complexes, and more. They are expected to transfer at least 90% of their profits to shareholders in the form of dividends.
Is a REIT an equity?
- Equity REITs are companies that invest in real estate. The majority of REITs are equity REITs, which own and operate income-generating properties. Rents are the primary source of revenue (not by reselling properties).
- Mortgage REITs are a type of real estate investment trust. Mortgage REITs provide money to real estate owners and operators directly or indirectly through the purchase of mortgage-backed securities. The net interest margin—the difference between the income they make on mortgage loans and the cost of funding these loans—is the main source of their profits. Because of this paradigm, they are susceptible to interest rate hikes.
- REITs that are a mix of stocks and bonds. These REITs combine equity and mortgage REIT investment strategies.
Is a REIT debt or equity?
Many financial consultants advise clients to retain varied sources of income in retirement, regardless of the size of their nest egg, according to Forbes. Retirees often live on a fixed income that is supplemented by investment income and principal withdrawals.
Investing in Real Estate Investment Trusts (REITs) can give high returns, diversification, and a prospective income stream to retirees and others with similar goals. Retirees are frequently dividend investors with conservative investment objectives. They may not be concerned with outperforming the market, but rather with creating and growing income while safeguarding and protecting their assets.
According to CNBC, retirees have traditionally focused on large cap equities and bonds as their primary source of investment income. Potential dividends from real estate could provide an alternate source of income for retirees. Equity REITs and debt REITs are examples of real estate that can be obtained through Real Estate Investment Trusts (REITs) (also known as mortgage REITs). We’ll go through some of the significant distinctions and similarities between the two types in the sections below.
Equity REITs and how they work
Equity REITs invest in and acquire properties across the commercial real estate spectrum, from shopping malls to hotels to office buildings to apartments. The rent they earn from tenants and businesses who lease the premises could be a source of cash for them. Furthermore, real estate ownership may result in price appreciation, resulting in an increase in the value of holdings.
Consider the case of Company A, which qualifies as a REIT. It raises capital from investors to buy an apartment building and leases out the space until it is fully occupied. This real estate property is currently owned and managed by Company A, which receives rent from its tenants on a monthly basis. Company A is a real estate investment trust (REIT).
Apartments, shopping complexes, office buildings, and self-storage facilities are examples of property types that equity REITs may specialize in holding. Some equity REITs are multi-asset and own a variety of properties.
Equity REITs must pay at least 90% of the income they collect to their shareholders in the form of dividends, which can be issued monthly or quarterly once a REIT has covered its selling, organizational, and operating costs involved with running its properties.
Debt or Mortgage REITs and how they work
Mortgage or debt REITs, unlike equity REITs, lend money to real estate buyers using debt or debt-like instruments such as first mortgages, mezzanine loans, and preferred equity structures. While rents are often the source of prospective income for equity REITs, interest generated on debt instruments is the source of revenue for debt REITs. Mortgage REITs, like equity REITs, must distribute at least 90% of their yearly taxable income to shareholders. Debt REITs, on the other hand, do not benefit from the property’s potential price appreciation, unlike equity REITs.
Consider Company B, which qualifies as a REIT and lends to a real estate sponsor. Unlike Company A, Company B has the ability to earn money from the interest on its loans. As a result, Company B is a debt REIT, or mortgage REIT.
Debt REITs invest in property mortgages rather than owning physical property. These REITs either lend money to real estate owners for mortgages or buy existing mortgages or mortgage-backed securities. The interest they get on the mortgage loans is the main source of their income.
Key similarities
Equity REITs and mortgage REITs can both be listed on major stock markets and be traded privately. Equity REITs are the more frequent of the two, according to NAREIT, accounting for the bulk of the US REIT industry. Equity REITs control more than $2 trillion in real estate assets in the United States, according to NAREIT, including over 200,000 properties in all 50 states and the District of Columbia. This means that there will be fewer mortgage REITs, which are backed by real estate but do not own or run the property.
Risks of investing in REITs
While REITs can provide diversification and attractive dividends, they also come with hazards. The majority of REITs do not trade on a public market, and those that do are considered illiquid investments. Investors who purchase non-listed REIT shares run the risk of not being able to sell them promptly or at their present value.
Furthermore, non-public REITs might be difficult to assess because valuations are not as regular as public REITs and are frequently reported quarterly rather than daily. Furthermore, many non-public REITs have significant upfront costs. As a result, before selecting to invest in a REIT, investors should examine all of the benefits and drawbacks.
Consider the “Risks” associated with each investment before making a decision; important information about risks, fees, and expenses is outlined in the official offering documents. Investing in REIT common shares is speculative, and risks include illiquidity, complete loss of capital, limited operating history, conflicts of interest, and blind pool risk.
Benefits of investing in REITS
REITs have the advantage of paying big dividends since they are mandated by the IRS to distribute at least 90% of their annual taxable revenue to shareholders. This means REITs can’t keep the majority of their profits to fund their own expansion. As a result, they’re geared at investors looking for a steady stream of income.
Another advantage of REITs is that they are designed to provide some level of diversification. By purchasing REITs that are located in numerous locations and invested in a variety of property types, REIT investors can add real estate to their portfolios without the hassle of purchasing an actual property or group of properties.
Access to equity and debt REITs
On our platform, RealtyMogul offers both equity and debt REITs. Our non-traded REITs invest in commercial real estate portfolios around the United States, including:
MogulREIT I use debt and debt-like products to invest in a variety of commercial assets. MogulREIT I’s major goals are to deliver attractive and reliable cash distributions while also preserving, protecting, and growing an investor’s capital commitment.
MogulREIT II invests in multifamily apartment buildings in major areas in the United States, both in common and preferred shares. The major goals of MogulREIT II are to achieve long-term capital appreciation in the value of our investments and to provide shareholders attractive and reliable cash distributions.
Investing in REIT common shares is speculative and has significant risks. The offering circular’s “Risk Factors” section offers a full assessment of hazards that should be examined before investing. Illiquidity, full loss of capital, limited operating history, conflicts of interest, and blind pool risk are just a few of the concerns. Natural disasters, economic downturns, and competition from other properties pose additional risks to MogulREIT I’s investments, which may be limited in assets or concentrated in a geographic region. Changes in demographic or real estate market conditions, resident defaults, and competition from other multifamily buildings are all risks that MogulREIT II’s multifamily investments may face.
All material presented here is for educational purposes only and does not constitute an offer or solicitation of any specific stocks, investments, or investment strategies. Nothing in this publication should be construed as investment, legal, tax, or other advice, and it should not be used to make an investment decision. This could include forward-looking statements and forecasts based on current beliefs and assumptions that we feel are fair. With investing, there are dangers and uncertainties, and nothing is certain.
What category are REITs?
Equity REITs and mortgage REITs are the two most common types of REITs to invest in (mREITs).
Although the bulk of equity and mortgage REITs are traded on major public stock markets, some are unlisted or private. PNLRs, or public nonlisted REITs, are not traded on national stock markets but are registered with the Securities and Exchange Commission. The ability to acquire and sell REIT shares is restricted, and it is normally done through share repurchase plans or on the secondary market. A private REIT is one that is not listed on a stock exchange or registered with the Securities and Exchange Commission; these REIT funds are often reserved for institutional investors.
The interest received from investing in residential and commercial mortgages, as well as mortgage-backed securities, provides income to mREITs. Servicing agencies such as Fannie Mae and Freddie Mac may hold these loans. A hybrid REIT is a mortgage REIT that invests in both property and mortgage assets.
Dividend income created by the ownership of long-term properties in a range of industries, including retail, hotel, and infrastructure, to mention a few, is how equity REITs make money. Several REITs suffered significant losses as a result of the pandemic, but any investment has significant risks. Here’s a closer look at equity REITs and the businesses and sectors in which they operate.
Why are REITs a bad investment?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.
What are the types of equity REITs?
The majority of real estate investment trusts (REITs) are traded on major stock exchanges, although there are also public non-listed REITs and private REITs. Equity REITs and mortgage REITs, often known as mREITs, are the two most frequent types of REITs. Equity REITs make money by collecting rent and selling the properties they hold for the long term. Mortgage REITs (mREITs) invest in commercial and/or residential mortgages or mortgage securities.
Are REITs leveraged?
REITs are also often more indebted than other companies because to their capital-intensive properties. In reality, interest costs typically account for the majority of their entire costs.
Can REITs take on debt?
A: The basic answer is that a real estate investment trust, or REIT, taking on debt can be beneficial, but it all relies on why the corporation decided to do so.
Realty Income is using its newly issued debt to service current debt, fund investments, and for general company reasons, as you said. So let’s take a look at each one separately.
We’ll start with debt payback. When REITs take out a loan, it works a little differently than when you take out a mortgage to buy a home. In most cases, the corporation just pays interest, with the principle due in one large sum at the maturity date. In other words, Realty Income will pay 3.25 percent interest on its $600 million debt ($19.5 million per year) until 2031, when the $600 million must be repaid.
According to Realty Income’s existing debt structure, $333 million of its debt is due this year, with another $69 million due in 2021. Paying off current debt could be a good excuse to take on more debt.
This is especially true when interest rates are at historically low levels, as they are now. Consider it in terms of a mortgage refinance. If a corporation originally borrowed money at 5% interest and can issue new debt at 3% interest, paying off the old loan with new debt can save a lot of money.
Then, to help fund acquisitions, REITs frequently issue debt, which can be a great strategy to enhance shareholder profits. This is a simplistic scenario, but the math works out in shareholders’ advantage if you can borrow money at 3.25 percent interest and buy properties that provide 6% annual returns. The majority of REITs, like the majority of homeowners, use debt to fund acquisitions.
Finally, issuing debt for “general corporate purposes” can be a grey area because “generic corporate purposes” can refer to nearly anything. And you generally don’t want to see debt created only for corporate objectives. However, as long as the other two conditions for issuing debt are met, shareholders should be unconcerned — especially if the debt is issued by a corporation with an A credit rating like Realty Income.
You also indicated that instead of using debt, you may suspend the dividend. If the corporation isn’t making enough money to fund its payout, this can be a smart option to debt. This has been observed in a number of mall and hotel REITs, for example.
Realty Income, on the other hand, pays out roughly $2.80 in dividends per year and generated $3.32 in funds from operations per share in 2019. Although the COVID-19 pandemic is expected to have a little impact on profitability, there’s no reason to anticipate that the debt issued will be used to pay the dividend.
To summarize, debt is an inevitable aspect of running a real estate investment trust, just as it is when purchasing investment properties. And, just like when debt is used to buy investment properties, it may be beneficial when utilized appropriately. Debt issuance should be scrutinized on a case-by-case basis, but issuing debt by a rock-solid REIT like Realty Income is a typical aspect of the business and not a cause for concern.
What is the difference between a equity REITs vs mortgage REITs?
Equity REITs own and run properties, and their primary source of revenue is rental income. Mortgage REITs make investments in mortgages, mortgage-backed securities, and similar assets, and earn money through interest payments.
What sector do REITs fall into?
Real estate is currently included in the financials sector and will become the 11th GICS sector in the future. All equity real estate investment trusts (REITs), as well as real estate management and development companies, will move to the new sector, while mortgage REITs will remain in the financials sector.
What are specialized REITs?
Specialty REITs own, manage, and collect rent from a diverse range of property types. Specialty REITs own assets that don’t fall under any of the other REIT categories. Movie theaters, casinos, farming, and outdoor advertising spots are examples of properties controlled by specialized REITs.
Do all REITs pay dividends?
A REIT is a security that invests directly in real estate and/or mortgages, comparable to a mutual fund. Mortgage REITs engage in portfolios of mortgages or mortgage-backed securities, whereas equity REITs invest mostly in commercial assets such as shopping malls, hotel hotels, and office buildings (MBSs). A hybrid REIT is a fund that invests in both. REIT shares are easy to buy and sell because they are traded on the open market.
All REITs have one thing in common: they pay dividends made up of rental income and capital gains. REITs must pay out at least 90% of their net earnings as dividends to shareholders in order to qualify as securities. REITs are given special tax treatment as a result of this; unlike a traditional business, they do not pay corporate taxes on the earnings they distribute. Regardless of whether the share price rises or falls, REITs must maintain a 90 percent payment.
Can you get rich off REITs?
There is no such thing as a guaranteed get-rich-quick strategy when it comes to real estate equities (or pretty much any other sort of investment). Sure, some real estate investment trusts (REITs) could double in value by 2021, but they could also swing in the opposite direction.
However, there is a proven way to earn rich slowly by investing in REITs. Purchase REITs that are meant to grow and compound your money over time, then sit back and let them handle the heavy lifting. Realty Income (NYSE: O), Digital Realty Trust (NYSE: DLR), and Vanguard Real Estate ETF are three REIT stocks in particular that are about the closest things you’ll find to guaranteed ways to make rich over time (NYSEMKT: VNQ).
