Types of REITs
There are two primary types of REITs: Equity REITs and Mortgage REITs. The two types give investors the opportunity to invest in either the equity financing or the debt financing of real estate.
Equity REITs are real estate companies that acquire commercial properties – such as office buildings, shopping centers and apartment buildings – and lease the space in the structures to tenants, who pay rent. After paying the expenses associated with operating their properties, Equity REITs pay out annually the bulk of the income they collect to their shareholders as dividends. Equity REITs also include capital appreciation from the sale of properties in the dividends they pay. In the case of Timber REITs, their dividends include gains from the sale of timber. In all cases, this significant dividend distribution is designed to approximate the investment return investors would receive if they owned properties directly.
Mortgage REITs invest in real estate mortgages or mortgage-backed securities, earning income from the interest on these investments, as well as from the sales of mortgages. Mortgage REITs, like other businesses, earn their profit from the difference between the income they receive and their costs, including their funding costs to purchase mortgage investments. They have the same requirement as Equity REITs to distribute the bulk of their income to their shareholders annually.
Public Equity REITs and Mortgage REITs may be listed on major stock exchanges, or they may be non-listed. Both are registered with the Securities and Exchange Commission (SEC), but non-listed REITs are sold directly to investors by brokerage firms and are not traded on any exchange. Equity and Mortgage REITs also can be privately held.