Now that you understand the REIT structure and the 90% distribution rule, let's examine the three types of REITs based on what they invest in. Each type has a different risk profile and income source.
Three Types of REITs
| Type | What They Do | Income Source | Risk Level |
|---|---|---|---|
| Equity REITs | Own and operate income-producing properties | Rental income + property appreciation | Moderate |
| Mortgage REITs | Invest in mortgages and mortgage-backed securities | Interest income from loans | Higher |
| Hybrid REITs | Combine equity and mortgage strategies | Both rental and interest income | Moderate-High |
Exam Tip: Gotchas
There are three REIT types, not two. Expect a question that omits hybrid REITs from the answer choices; the exam also tests whether you can match the income source (rent vs. interest) to the correct type.
Equity REITs
The most common type of REIT:
- Own and operate real property (they are landlords)
- Property types include offices, apartments, shopping malls, warehouses, hotels, and data centers
- Revenue comes primarily from rental income collected from tenants
- May also benefit from property value appreciation over time
- Tend to provide some inflation protection because property values and rents generally rise with inflation
Exam Tip: Gotchas
Equity REITs own property; their income is rent, not interest. The inflation protection point applies to equity REITs only.
Mortgage REITs (mREITs)
A fundamentally different model from equity REITs:
- Do not own property directly
- Instead, they lend money to real estate owners or invest in mortgage-backed securities (MBS)
- Revenue comes from the interest spread (difference between borrowing costs and lending rates)
- Highly sensitive to interest rate changes; when rates rise, borrowing costs increase and the value of existing mortgage holdings falls
- Generally considered higher risk than equity REITs
Exam Tip: Gotchas
Mortgage REITs earn an interest spread, not rent. They are highly sensitive to interest rate changes and do not own real property.
Hybrid REITs
- Combine both equity REIT and mortgage REIT strategies
- Own some properties and hold mortgage investments
- Provide diversification across both income sources
- Risk level falls between equity and mortgage REITs
Exam Tip: Gotchas
The exam may describe a REIT's activities and ask you to identify the type. Key distinction: equity REITs own property and collect rent; mortgage REITs lend money and collect interest. If a REIT earns interest income from MBS, it's a mortgage REIT, not an equity REIT.
Next, let's explore one of the most tested REIT topics: the difference between listed and non-traded REITs.