Contributor, Benzinga
Updated: November 1, 2021

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While Equity REITs own and manage real estate properties to generate rental income, Mortgage REITs (mREITs) invest in and own mortgage loans. They provide the financing for real estate and in turn generate income from the interest.

What is a Mortgage REIT?

Mortgage REITs simply originate or purchase mortgage and mortgage backed securities (MBS). They then earn money from the interest on those mortgages. These investments can have tremendous profits. Mortgage REITs may invest in:

  • Commercial Mortgages and Mortgage-Backed Securities
  • Residential Mortgages and Mortgage-Backed Securities
  • Both Commercial and Residential Mortgages and Mortgage-Backed Securities.

While both residential mortgage REITs and commercial mortgage REITs earn the majority of their income through interest payments on the debt they own, a lot of mREITs also own income-producing real estate.

Like all REITs, mortgage REITs have to follow strict guidelines set by the Internal Revenue Service (IRS) to maintain their status as a REIT. This means they're required to pay out at least 90% of their taxable income to shareholders in the form of dividends.

Benefits of mREITs

Investing in mortgages grants investors the ability to diversify their real estate investments without having to actually own property. This is seen as a benefit by many REIT investors.

Mortgage securities are also a much more liquid asset. This is especially true with agency mortgage backed securities, which are considered one of the lowest risk investments. Agency MBS are guaranteed by the federal government, so they are easy to leverage and easy to sell on the mortgage market.

One of the greatest benefits to investing in a mortgage REIT is that mortgage REIT stocks typically pay a higher dividend compared to an equity REIT. Mortgage REITs typically have a dividend yield of at least 6%, but sometimes reach higher than 10%.

Mortgage REITs help to finance millions of residential homes, which is important for the economy. Facilitating the housing market has great effects on the economy. Investing in the buying and selling of commercial income-producing real estate is helpful too - and has a lot of long term potential.

Risks for mREITs

Interest rate risk: Interest rates are always a known risk with any REITs. Rising interest rates can cause REITs to lose value. Since mortgage REITs use short-term debt to purchase the mortage securities they invest in, rising interest rates can squeeze their margins. On the other hand, mortgage REITs can even be affected by interest rates falling, since prepaid mortgages and refinancing are more doable with low interest rates. This limits potential earnings for shareholders.

Mortgage defaults: Another risk to keep in mind is defaulting on mortgages. When borrowers do not pay their mortgage, there is no money to gain from the interest. Investors can lose money when they invest in mortgages that are not backed by a federal agency.

Mortgage REITs are a great investment if you are looking to make money in real estate without having to actually own any property. Profiting from mortgages and mortgage-backed securities has proven to be successful in generating interest income, with immense opportunities.

Best Mortgage REITs

If you're ready to start investing in mREITs, these 3 mortgage REIT stocks offer significant return potential to investors through their high quarterly dividend payments.

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Mortgage REIT ETFs

Another option for investing in mREITs is to invest in an ETF that invests in mortgage REIT stocks. Investing in an mREIT ETF is an easy way to invest in this industry while allowing a professional fund manager to choose which mortgage REITs to invest in, the right time to buy, and when to sell.

Below are 3 mortgage REIT ETFs worth looking at:

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Industry Overview

Number of REITs33
Average Dividend Yield8.04%
YTD Total Return17.3%
May Total Return0.33%
2020 Total Return-18.77%

Quarterly Data

Financial MetricQ1 20212020
Dividends Paid ($M)$1,534$5,715

REIT Alternatives

REITs provide a low-cost and simple way to invest in real estate. However, they aren't the only option available to generate passive income through real estate with a low minimum investment.

Real estate crowdfunding offers investors the ability to decide which properties they want to invest while still enjoying passive income at a fraction of the cost of traditional methods of investing in real estate. Here are some of our favorite real estate crowdfunding platforms.

All Mortgage REITs

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Continue reading: BEST MORTGAGE REITS TO BUY IN JULY