Mortgage Reit

Mortgage REIT definition

A real estate investment trust (REIT) offers significant advantages for investors and typically offers high yields with moderate risk, making it a popular option.  Mortgage REITS are comprised of real estate investment securities, rather than properties, and can be purchased as individual shares or as part of a mutual fund consisting of mortgage REIT investments. Mortgage REITs may consist of only one type of real estate investment or investments from only one area of the country or may be diversified across a wide range of real estate securities throughout the market and the country.

How they work

Mortgage REITS are funded by shareholders and use these funds to finance mortgages for individuals and companies. Because the loans made with these funds are secured, the risk is reduced for mortgage REITs and for their shareholders. Mortgage REITS typically are not assessed tax on the portion of profits they distribute as dividends to their shareholders. This means that in most cases, the mortgage REIT does not pay any income tax at all and is treated as a pass-through entity. In order to qualify for this status, the mortgage REIT must meet strict IRS requirements, including:
  • 95% of total income must be derived from real estate income, dividends, and interest
  • 75% of all investments must be in real estate
  • Ownership of stocks in taxable REIT subsidiary companies is limited to 20% or less
  • 90% of taxable income must be paid in shareholder dividends
  • Joint ownership by at least 100 persons
  • The 5/50 rule: no more than 50% of all shares in the company can be held by any five people during the latter half of the fiscal year
For mortgage REIT s that can adhere to these requirements, the tax benefits are substantial.

Mortgage REIT vs. Equity REIT

The most significant difference between mortgage REITs and equity REITs is the type of real estate investments that predominate in each. Mortgage REITs specialize in financing mortgages, while equity REITs purchase property outright and derive profits from establishing equity and charging rents on these properties. As a result, the risk factor of a mortgage REIT vs. equity REIT investment is higher. Equity REITs enjoy higher stability due to the less volatile nature of real property ownership, and offer property appreciation-over-time potential as well, while mortgage REITs offer higher levels of profitability with a higher degree of risk as well. For these reasons mortgage REITs are typically treated as short-term investments, while equity REITs are usually held by investors for longer periods of time.

Mortgage REIT ETF

A mortgage REIT exchange-traded fund, or ETF, is a portfolio of mortgage REITs. Essentially, it provides a quick way to diversify mortgage REIT holdings without requiring in-depth market research on the part of the investor. Because mortgage REIT ETFs provide exposure to a wide range of securities in the mortgage REIT field, they are often a solid choice for investors testing the market in mortgage REIT securities trading.
Tim Ord
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