A REIT is a company that owns and operates real estate. This type of investment can be attractive to investors for many reasons, not the least of which is the tax benefits. The IRS offers favorable treatment for investments in REITs by offering a special lower rate on capital gains and dividends received from these types of investments. In this blog post, we will discuss 5 different types of REITs: equity, mortgage, mezzanine, commercial mortgage-backed securities (CMBS), and fund-of-funds (FoF).
Equity REITs:
An equity REIT owns and manages properties that produce income from rents. The company typically earns a commission for finding tenants and collects rent payments from them. Equity REITs can be divided into two categories: retail and industrial. Retail REITs own shopping malls, department stores, and other types of retail spaces. Industrial REITs own warehouses, storage facilities, and other areas that are well suited for businesses.
Mortgage REITs:
A mortgage REIT uses a large portion of its capital to purchase mortgages which they then earn interest from every month. The company can grow by purchasing new mortgages or by acquiring existing pools of mortgages from another lender through a “pooling-of-interest”. Mortgage REITs can be further divided into two categories: Agency and non-Agency.
Mezzanine REITs:
Mezzanine REITs provide capital to other real estate-related companies in the form of loans or high yield debt securities. The investments can be in the form of first mortgage loans, subordinated debt, or preferred equity. This type of REIT typically charges a higher interest rate on its debt investments and also enjoys some tax benefits.
Commercial Mortgage-Backed Securities (CMBS):
CMBS are securities that are backed by mortgages on commercial properties. These types of investments usually offer a higher yield than traditional bonds due to the increased risk involved with lending money to businesses. The interest payments on CMBS are usually pass-through payments which means that the company that originated the mortgages is responsible for making monthly interest payments to the CMBS holders.
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Fund-of-Funds (FoF):
A fund of funds is a “fund of companies” which means that it invests in other entities such as equity and mezzanine REITs, CMBS, and FoFs. The advantage to investing in these types of securities through an FoF is that investors do not need the expertise needed to analyze individual investment opportunities. Instead, they rely on an experienced partner to choose their investments for them.