Equity REIT vs. Mortgage REIT: An Overview

There are several types of real estate investments trusts (REITs) that investors can purchase, including equity-based REITs and mortgage-based REITs. Equity REITs invest in and own properties, while mortgage REITs own and invest in property mortgages.

A REIT is a type of security in which the company owns and generally operates real estate or real estate related assets. REITs are similar to stocks and trade on major market exchanges. REITs allow companies to buy real estate or mortgages by using combined investments from its investors. This type of investment allows large and small investors to own a share of real estate.

To qualify as a REIT, a company must satisfy many standards, such as having at least 100 shareholders, being managed by a board of directors and paying at least 90% of its taxable income in the form of dividends every year.

REITs are generally required to have at least 100 investors, and regulations prevent what would otherwise be a potentially nefarious workaround: having a small number of investors own a majority of the interest in the REIT. At least 75% of a REIT’s assets must be in real estate, and at least 75% of its gross income must be derived from rents, mortgage interest, or gains from the sale of the property. Also, REITs are required by law to pay out at least 90% of annual taxable income (excluding capital gains) to their shareholders in the form of dividends. This restriction, however, limits a REIT’s ability to use internal cash flow for growth purposes.

Equity REITS

Equity REITs are responsible for acquiring, managing, building, renovating and selling real estate. Equity real estate investment trusts' revenues are mainly generated from rental incomes from their real estate holdings. Equity REITs typically invest in office and industrial, retail, residential, and hotel and resort properties. The equity REIT is the most common type of REIT. An equity REIT may invest broadly or may focus on a particular segment of a market. 

Mortgage REITS

Contrary to equity REITs, mortgage REITs generally lend money to real estate buyers or acquiring existing mortgages or mortgage-backed securities (MBS). While equity REITs typically generate their incomes from renting out real estate, mortgage REITs mainly generate their revenues from the interest that earned on their mortgage loans.

For example, assume company ABC qualifies as a REIT. It purchases an office building and rents out office space with the funds generated from investors. Company ABC owns and manages this real estate property and collects rent every month from its tenants. Therefore, company ABC is considered an equity REIT.

On the other hand, assume company DEF qualifies as a REIT and loans out money to a real estate developer. Unlike company ABC, company DEF generates income from the interest earned on the loans. Therefore, company DEF is a mortgage REIT.

Key Takeaways

  • A REIT is a type of security in which the company owns and generally operates real estate or real estate related assets.
  • Equity REITs invest in and own properties, while mortgage REITs own and invest in property mortgages.