Equity REITs are real estate investment trusts that own or manage income-generating properties such as office buildings, shopping malls, and apartment buildings and lease the space to tenants. Following the payment of operational expenditures, equity REITs distribute the majority of their profits to their shareholders in the form of dividends. The sale of properties is also a source of income for equity REITs.
When the market speaks to REITs, it is usually referring to listed equity REITs because most REITs operate as stock REITs.
Today’s U.S. Equity REIT Market
The majority of today’s REIT industry is made up of equity REITs, which contribute to fuel the US economy. They control more than $2.5 trillion in real estate assets in the United States, including over 500,000 buildings in all 50 states and the District of Columbia. Under frequently accepted industry classification standards, equity REITs also make up the majority of the headline real estate sectors.
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 are the three basic types of REITs?
- 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” connected with each investment before making a decision. The official offering paperwork contain important information concerning risks, fees, and expenses. Illiquidity, full loss of cash, short operating experience, conflicts of interest, and blind pool risk are all hazards associated with investing in REIT common shares.
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.
Do REITs count as equity?
“I saw you don’t have any REITs in your portfolio anymore.” Do you feel like you’re sacrificing part of your flexibility? And, for those of us who do include REITs in our portfolios, how do you recommend we account for them in our overall stock/bond allocation?”
This issue appealed to me because it allows us to clarify a couple of frequent misconceptions concerning REITs.
What is a REIT?
REITs (real estate investment trusts) are corporations that invest in real estate — sometimes commercial, sometimes residential, and sometimes both.
Because of the way they’re taxed, REITs are one of a kind. They are not liable to corporate income tax if they meet certain criteria. REITs, for example, must annually distribute at least 90% of their taxable profits to shareholders.
Should REITs Be Counted as Stocks or Bonds?
Shares of ownership in a REIT are still, by definition, equity investments, despite their special tax treatment and high income. In other words, a REIT fund should be regarded as a stock fund in your overall stock/bond allocation because it is a stock fund – albeit a sector-specific one, similar to a health care fund.
REITs Are Included in Total Market Funds
While I do not have a REIT-specific fund in my portfolio, I do have REITs. REITs, like equities from every other market sector, are included in broad “total stock market” index funds in proportion to their market weight.
Many other stock index funds incorporate REITs as well. For example, the S&P 500 comprised 15 different REITs as of last year.
REITs as a Diversifier
REITs are often thought to be a good diversifier for a typical stock portfolio because of their high yield and because they are often more closely correlated to real estate prices than the stock market. The idea is to overweight them relative to their market weight in the hopes of reducing overall portfolio volatility.
Personally, I’ve found the “REITs as a diversifier” argument strong enough (just barely*) to include a REIT fund in the index fund portfolio my wife and I were using until lately. That said, now that we’ve switched to an all-in-one LifeStrategy fund that doesn’t overweight REITs, I’m not concerned that we’re losing out on anything that will have a significant impact on our long-term investment success.
*It’s important to remember that imperfect correlation does not make something a useful diversifier; otherwise, you could overweight any stock in a total stock market index fund (on the assumption that each individual stock has an imperfect correlation to the rest of the portfolio) and reduce the portfolio’s volatility.
Do 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.
Do REITs take on debt?
Traditionally, these sources have been secured debt or mortgages, as well as public stock offers. Since 1993, equity REITs have increasingly relied on unsecured loans to meet their capital needs, rather than secured debt or stock.
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).
Why REITs are bad investments?
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.
How do REITs make money?
REITs, like any other business, require capital. An IPO (initial public offering) is how a publicly traded REIT (real estate investment trust) accomplishes this. This is similar to selling any other stock to the general public, who are investing in the company’s income-producing real estate. People who purchase initial public offerings (IPOs) are investing in real estate that is managed similarly to a stock portfolio. These outside cash sources allow the REIT to acquire, develop, and manage real estate in order to generate profits. REITs generate income, and shareholders must get 90 percent of that taxable income on a regular basis. REITs create money by renting, leasing, or selling the assets they purchase. The shareholders elect a board of directors, which is in charge of selecting investments and recruiting a team to oversee them on a daily basis.
FFO stands for funds from operations, which is how most REIT earnings are calculated. FFO is defined by the National Association of Real Estate Investment Trusts (NAREIT) as the net income from rent and/or sales of properties after deducting administrative and financing costs. The NAREIT’s net income computations follow GAAP (generally recognized accounting rules). The issue is that depreciation of assets is presumed to be a predictable given in GAAP calculations, which skews the true measure of a REIT’s revenue in a negative direction because real estate, which is what REITs deal in, retains or even improves in value over time. As a result, depreciation is not included in FFO’s net income.
How much debt should a REIT have?
as an illustration ” I don’t have Duke’s phone number on my screen right now, but email me privately while we’re not live, and we’ll talk about Duke.” In terms of REIT debt versus cash, there are a few factors to keep in mind. For one, REITs often operate with more debt than other businesses, and they do it in a healthy fashion. Consider this: when you buy a house, you typically have 80 percent of the house in debt and just 20 percent in equity. While this isn’t exactly the same, a REIT functioning in a 50 percent equity, 50 percent debt capitalization is completely fair. Debt to EBITDA is a key measure for me. That one appeals to me; I prefer it to be under the age of six. In terms of cash, most REITs don’t keep a lot of cash on hand in regular times. REITs have taken down their credit lines to ensure they have adequate liquidity to go through whatever lies ahead, as you can see on one today. REITs don’t usually hold a lot of cash in normal times. It’s not a good business model to keep a lot more cash than you need, especially when almost all REITs, with the exception of the malls that recently went bankrupt, are quite cash flow positive in normal circumstances. As a result, they don’t need to store much cash in the bank.
