Real Estate Investment Trusts (REITs) have been around for a number of years. However, they have some unique risk – reward features that every investor should be aware of. Consequently, we have provided a series of posts, with this being the third, which provide information concerning these types of investments. Because of the fact that this post is being provided for informational and/or educational purposes only, it is not designed to be complete in all material respects. Thus, it should not be relied upon as legal or investment advice. If you have any questions about REITs, you should contacted a qualified professional.
Three Categories of REITs: Equity, Mortgage, and Hybrid:
REITs generally fall into three categories: equity REITs, mortgage REITs, and hybrid REITs. Most REITs are equity REITs. Equity REITs typically own and operate income-producing real estate. Mortgage REITs, on the other hand, provide money to real estate owners and operators either directly in the form of mortgages or other types of real estate loans, or indirectly through the acquisition of mortgage-backed securities. Mortgage REITs tend to be more leveraged (that is, they use a lot of borrowed capital) than equity REITs. In addition, many mortgage REITs manage their interest rate and credit risks through the use of derivatives and other hedging techniques. You should understand the risks of these strategies before deciding to invest in these types of REITs. Hybrid REITs generally are companies that use the investment strategies of both equity REITs and mortgage REITs.
Because they often invest in debt securities secured by residential and commercial mortgages, mortgage REITs can be similar to certain investment companies that are focused on real estate. Generally, companies that invest a majority of their assets in real estate are exempted from the rules that govern investment companies, such as mutual funds. However, please keep in mind that the SEC has initiated a review to determine whether certain mortgage REITs should continue to be exempt from investment company regulation. Those rules generally limit the amount of leverage that a fund can use and regulate the fees that can be charged to investors.