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John Naronha

What are the different types of REITs?

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Real estate investment trusts (REITs) are a crucial component of one's modern portfolio. Real estate investment trusts (REITs) are considered to be a key component in building a modern portfolio. The unique feature of REITs to generate dividend income along with capital appreciation makes them an excellent offset to stocks, bonds, and cash.

Mentioned below are the three most widespread Real estate investment trusts (REITs)

Mortgage REITs-

Mortgage REITs, also known as mREIT's lend money directly to landlords and their operators to purchase a property. About 10 percent of REIT investments are in mortgages as opposed to the real estate itself.

As opposed to equity REITs, they do not invest in properties. Mortgage REITs generate revenue through the interest paid on their mortgage loans. Interest is earned either directly from mortgages or mortgage-backed securities. The factors that impact mREITs include changes in mortgage rates, prepayments of a loan before the due date, and credit events like foreclosure or bankruptcy. When interest rates increase, they would translate into a fall in the book values of a mortgage REIT, driving stock prices lower. Besides, a considerable amount of the capital received by mortgage REITs is through secured and unsecured debt offerings. In the event of an interest rate increase, the cost of financing will surge, lowering the value of the loan portfolio. On the contrary, in a low-interest rate regime where the outlook of an interest rate hike is high, most mortgage REITs trade at a discount to the net asset value per share.

Equity REITs-

Equity REITs generally own and control income-producing real-estate assets like offices, shopping centers, residential apartments, medical & health care facilities, housing complexes for students, hotels, resorts, timberlands, data centers, and cell phone towers. They lease space in these facilities to tenants for rent. Most of the equity REITs operate in their core areas namely retail, residential, health care & office spaces. A majority of the REITs currently in operation are equity REITs and therefore whenever there is a discussion about REIT's, it mostly refers to equity REITs. Investors in the US looking to diversify between equities and REITs will be able to achieve better results when they diversify their large-cap portfolio with equity REITs since the long-term returns between the two portfolios were found to be correlated by around 50-60 percent.

Hybrid REITs-

A REIT that combines the investment strategies of both the equity REIT and mortgage REIT is known as a "hybrid REIT." A hybrid REIT generates income from rent and capital gains just like an equity REIT. However, it receives interest, like a mortgage REIT. Although not as popular as the mortgage and equity REITs, hybrid REITs track the performance of the broader REIT indices with investors likely to gain a balanced exposure to factors driving real estate valuations.

 

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There is a whole separate class of assets - Real estate investment trust. It is a company that specializes in real estate. Some are engaged in construction and the subsequent delivery of the buildings, for rent. And their primary source of income, as you understood, is from the rent on their real estate. mREIT is a mortgage fund. Funds of this type do not buy real estate. They buy mortgages backed securities on the secondary mortgage market – in other words, they purchase mortgage debts. They find their clients through brokerage agencies such as for example Mortgage Broker Bristol.

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