Real estate investment trusts (REITs) offer investors the opportunity to invest in the real estate sector without owning physical properties. They provide access to a wide range of real estate assets, including retail spaces, residential homes, healthcare facilities, and office spaces. Among the various types of REITs available, mortgage REITs often go unnoticed and are under-appreciated by many investors.
What Is A Mortgage REIT?
Mortgage REITs are a type of REIT that specialize in mortgages, mortgage-backed securities, and related assets. Unlike equity REITs, which own and manage properties, mortgage REITs generate income through the interest they charge on real estate loans. They leverage debt to earn revenue from the interest income on their mortgage assets, aiming to profit from the spread between interest income and funding costs.
Caption: Best mortgage REITs
Mortgage REITs Vs. Equity REITs
There are two main types of REITs: mortgage and equity. Mortgage REITs invest in mortgages and mortgage-backed securities, generating income through interest. Equity REITs, on the other hand, focus on buying and operating rental properties, earning revenue from rental income. Both types of REITs are required to distribute 90% of their income to investors.
How To Invest In Mortgage REITs
Investing in mortgage REITs allows individuals to enter the lucrative real estate industry without owning physical properties. Investors can choose to invest in publicly traded mortgage REITs by signing up with a brokerage, depositing funds, and purchasing shares. However, the real challenge lies in selecting the right mortgage REITs for investment. Conducting thorough research and understanding the benefits and risks associated with these investments is crucial.
Benefits Of Mortgage REITs
Investing in the best mortgage REITs can offer several benefits, including:
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High-Yield Dividends: Mortgage REITs are known for providing high-yield dividends, often surpassing those of traditional REITs. The average dividend yield for mortgage REITs is approximately 10.6%, compared to the 1.9% yield of S&P 500 stocks.
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Diversification: Mortgage REITs offer investors the opportunity to diversify their equity holdings further. By investing in mortgage REITs, individuals can add real estate-related assets to their portfolios without physically owning properties. These investments can act as a hedge against market fluctuations, especially during periods of rising interest rates.
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Liquidity: Unlike traditional real estate transactions, investing in mortgage REITs provides liquidity. Investors can trade shares daily, allowing them to easily access their capital when needed.
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Supporting Mortgage Loans: By investing in mortgage REITs, individuals indirectly contribute to providing mortgage loans to aspiring homeowners. This investment supports the broader economy by enabling more people to purchase real estate.
Risks of Mortgage REITs
While mortgage REITs have historically generated attractive returns, investors should be aware of the following risks:
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Tax Implications: Dividends received from mortgage REITs are considered income and are subject to taxation.
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Interest Rate Volatility: Mortgage REITs thrive in high-interest rate environments but can be impacted by changes in interest rates. Lower rates can diminish their income potential, while higher rates can boost revenues.
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Individual Property Risks: Mortgage REITs provide loans for various types of real estate, each with its own risks. Investors should evaluate the types of loans a mortgage REIT offers to determine their exposure to potential risks associated with specific properties.
3 Best Mortgage REITs To Invest In
While there are numerous mortgage REITs available, here are three industry-leading options:
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Annaly Capital Management Inc. (NYSE: NLY): Annaly Capital Management is a diversified capital manager specializing in financing residential and commercial real estate assets. The company aims to increase its net interest margins as interest rates rise.
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Arbor Realty Trust Inc. (NYSE: ABR): Arbor Realty Trust owns a diversified portfolio of financial assets, primarily in the multifamily housing sector. The company has a strong track record and is focused on protecting its dividends.
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Starwood Property Trust Inc. (NYSE: STWD): Starwood Property Trust operates in multiple segments, including commercial and residential lending, infrastructure lending, managing equity interests, and loan servicing. Despite challenges during the pandemic, the company has exceeded expectations and has a solid growth plan in place.
Summary
Mortgage REITs offer investors a unique way to diversify their portfolios and benefit from the real estate industry's income potential. These REITs provide high-yield dividends, liquidity, and the ability to hedge against interest rate fluctuations. However, it is essential to conduct thorough research and consider the risks associated with these investments. By carefully selecting the best mortgage REITs, investors can enhance their portfolios and achieve long-term financial goals.
