Types Of REITs
Different types of REITs operate in different ways. Below is a closer look at some of the most common types of REITs to understand.
Mortgage REITs
Mortgage REITs (mREITs) derive their income from interest on mortgages. Each type of property is built with the proceeds of a mortgage, and some REIT investors collect the interest paid on the mortgage as income. They’re popular because they return the relatively high interest payments collected on commercial mortgages.
Commercial real estate mortgages come at a higher interest rate because they’re considered riskier than those underlying residential real estate. Thus, investors in commercial mortgage REITs will earn more interest (while assuming more risk) than those investing in residential real estate mortgage REITs.
Equity REITs
Properties can generate rental income, which, after collecting fees for property management, provides income to its investors. These REITs generate income from renting real estate to tenants. After paying expenses for operation, equity REITs pay out dividends to their shareholders on a yearly basis.
Hybrid REITs
Hybrid REITs contain both equity and mortgage holdings. They give investors more diversity, offering better protection from real estate market swings. They can work well with both income- and growth-oriented portfolios.
Publicly Traded REITs
Due to the accessible nature of publicly traded REITs, this is the way most people invest in real estate.
Publicly traded REITs trade on a stock exchange, such as the Nasdaq or the New York Stock Exchange (NYSE). They’re highly liquid – meaning they can be bought or sold at any time, so your money isn’t tied up – and are open to all types of investors. You can open a brokerage account with any online trading platform and begin purchasing REITs.
Publicly Non-Listed REITs
Publicly non-listed REITs are offered to all but not listed on stock exchanges. There are both legitimate reasons for this – as when a project requires a low profile for competitive reasons – and unscrupulous ones as well. These projects typically offer little transparency and often charge upfront fees, so you need to know who you’re dealing with and have a keen understanding of the project and its risk.
The potential upside is a bigger return that reflects the greater risk you’re incurring. However, there are significant potential downsides as well for novice investors. In addition to the risk of fraud, buying into a public non-listed REIT means you are forsaking the consumer protections and avenues of redress afforded by SEC regulations.
Private REITs
Private REITs are not open to the public. They aren’t registered on the SEC and are only sold to institutional investors or accredited investors. These REITS usually have high minimum investments and are considered illiquid investments, as they can be very hard to sell.
