A mortgage Real Estate Investment Trust (REIT) is a trust that buys mortgages or offers real estate financing in the form of mortgages and mortgage-backed securities. The mortgages a REIT focuses on can be residential or commercial, or a mixture of both.
Investors can purchase shares in a REIT, similar to owning stocks. If the trust makes an income, the profits are paid to the shareholders as dividends.
To qualify as a mortgage REIT specific qualifications must be met.
- The majority of the REIT’s assets and income are related to real estate, including mortgages.
- At least 90% of taxable income earned by the REIT should be distributed to investors as dividends.
- Have a board of directors managing the trust.
- Shares owned in the REIT are fully transferable.
- After being established one year, the REIT needs over 100 shareholders.
- At least 75% of total assets should be invested in real estate.
There are additional requirements to qualify as a REIT, and it is important to understand these fully before attempting to form a trust.
REITs are formed for many reasons. The first is the potential tax benefits. A qualified REIT can deduct the dividends paid annually from the corporate taxes owed. So, if 100% of dividends are distributed to shareholders, there is the potential to owe no corporate tax.
For investors, REITs provide the opportunity to invest in a more diverse portfolio and earn a potential passive income if dividends are paid.
What is the Difference Between an Equity and a Mortgage REIT?
In a mortgage REIT, the trust deals with mortgages instead of real property like in an equity REIT.
A REIT can originate and hold mortgages, collect interest, or can invest in mortgage-backed securities. In a mortgage-backed security (MBS), the REIT purchases a pool of mortgages, either commercial or retail, from a lender. The investment funds raised by the MBS are used to fund mortgages, and the investors, in this case the REIT, are paid dividends on the interest earned, which is then distributed to shareholders in the trust.
Many variables can impact the earnings of a mortgage REIT.
- Frequently changing mortgage interest rates can impact the earnings of the REIT.
- The potential of higher credit risk if mortgages purchased aren’t backed federally.
- In commercial mortgages, there is the potential the borrower can default, causing a credit risk.
- If a borrower pre-pays their mortgage or sells the property the mortgage REIT needs to reinvest the repaid funds at the current interest rate.
Ultimately, mortgage REITs are a complicated investment, and it is important to fully understand how they work before investing.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. There is no guarantee you will receive any income. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
