Three Types of REITs Explained: Equity, Mortgage, and Hybrid
Now that you know what REITs are and why they exist, let’s talk about the different flavors they come in.
In Chapter 2 of Real Estate Investment Trust Investing by Mike Hartley, he breaks down the three main types of REITs: equity, mortgage, and hybrid. Understanding the difference is important because each one makes money in a completely different way, carries different risks, and fits different investing goals.
Think of it like this. All three are real estate investments, but they’re about as similar as a landlord, a bank, and someone who does both.
Equity REITs: The Property Owners
Equity REITs are the most common type, and they’re probably what most people picture when they think about REITs. These companies actually own and operate real estate. We’re talking about physical buildings. Shopping malls, apartment complexes, office parks, hospitals, warehouses, data centers.
How they make money: Rent. Tenants pay rent to use the space, and the REIT collects that income. After covering operating expenses and maintenance costs, the remaining profit gets distributed to shareholders as dividends.
Why people like them: The income is relatively predictable because it’s based on long-term lease agreements. If a REIT owns an apartment building with 200 units on 12-month leases, that’s a pretty steady stream of cash flow. And as rents increase over time, dividend payments can grow too.
The risks: Property values can decline. Vacancies happen. If a big tenant leaves a commercial property, that’s a significant hit to income. And real estate markets are cyclical, so downturns affect equity REITs directly.
But here’s the thing. Because equity REITs own actual physical assets, there’s a tangible floor to their value. The buildings don’t disappear. They might lose value temporarily, but they still exist and can still generate income.
Hartley points out that equity REITs are required to distribute at least 90% of their taxable income as dividends. That’s the law. So as long as the properties are generating income, shareholders are getting paid.
Mortgage REITs: The Lenders
Mortgage REITs, often called mREITs, take a completely different approach. They don’t own buildings. Instead, they invest in mortgages and mortgage-backed securities. Basically, they lend money to real estate owners (or buy existing loans) and earn income from the interest payments on those loans.
How they make money: Interest. When someone takes out a mortgage to buy a property, a mortgage REIT might be the one funding that loan or buying it on the secondary market. The borrower pays interest, and that interest flows to the REIT and then to shareholders.
Why people like them: The dividend yields can be really high. Like, noticeably higher than equity REITs. Because mortgage REITs use a lot of borrowed money (leverage) to amplify their returns, the income numbers can look very attractive.
The risks: And this is where you need to pay attention. Mortgage REITs are highly sensitive to interest rate changes. When interest rates go up, the value of existing mortgages goes down, and borrowing costs for the REIT increase. This can squeeze profits hard.
During the 2008 financial crisis, mortgage REITs got hammered. When borrowers started defaulting on their mortgages en masse, the securities these REITs held lost enormous value. Some mortgage REITs didn’t survive.
Hartley doesn’t try to scare you away from mortgage REITs. He just wants you to understand that the higher yields come with higher risk. The income can be great when things are going well, but it’s more volatile than what you’d get from equity REITs.
If equity REITs are like being a landlord, mortgage REITs are like being the bank. And banks can have bad years.
Hybrid REITs: The Best of Both Worlds?
Hybrid REITs do exactly what the name suggests. They combine the strategies of both equity and mortgage REITs. They own properties AND invest in mortgages or mortgage-backed securities.
How they make money: Dual income streams. Rental income from the properties they own, plus interest income from the loans and securities they hold. Two sources of revenue instead of one.
Why people like them: Diversification within a single investment. You’re not entirely dependent on property values or entirely dependent on interest rates. If one side of the business struggles, the other side might help cushion the blow.
The risks: Here’s the catch. Having exposure to both strategies also means you’re exposed to both sets of risks. Property market downturns can hit the equity side while rising interest rates squeeze the mortgage side. In a really bad economic environment, both sides can struggle at the same time.
Hybrid REITs are also less common than pure equity or mortgage REITs, so you have fewer options to choose from. And because they’re doing two things at once, they can be harder to evaluate. You need to understand both the property portfolio and the mortgage portfolio to know what you’re buying.
Comparing the Three
Let me lay this out simply:
| Equity REITs | Mortgage REITs | Hybrid REITs | |
|---|---|---|---|
| What they own | Physical properties | Mortgages and loans | Both |
| Income source | Rent | Interest | Rent + Interest |
| Typical yields | Moderate | Higher | Varies |
| Interest rate sensitivity | Lower | High | Moderate |
| Risk level | Moderate | Higher | Moderate to High |
| Best for | Steady income, growth | High income, higher risk tolerance | Diversified exposure |
Which Type Should You Pick?
Hartley doesn’t tell you one type is better than the others. His point is that you need to understand what you’re buying and why.
If you want relatively stable income with potential for property value appreciation, equity REITs are probably your starting point. They’re the most straightforward and the easiest to understand.
If you’re chasing higher yields and you’re comfortable with more volatility, mortgage REITs might interest you. Just go in with your eyes open about the interest rate risk.
If you want a mix and you’re willing to do extra research, hybrid REITs offer that combined exposure.
And honestly? You don’t have to pick just one. A lot of investors hold a mix of all three types to balance income, growth, and risk.
My Take
After reading this chapter, I came away thinking equity REITs are the natural starting point for most people. The concept is simple (buy shares in companies that own buildings and collect rent), the income is relatively predictable, and the risks are easier to understand.
Mortgage REITs are interesting but feel more advanced. You really need to understand interest rate dynamics and credit risk before putting money there. And hybrid REITs are fine, but I’d rather build my own mix by choosing specific equity and mortgage REITs separately.
Next up, we’ll look at the difference between publicly-traded and private REITs, plus a comparison with other real estate investment options.
This is Part 3 of a blog series covering “Real Estate Investment Trust Investing: The Secret to Passive Income from REITs” by Mike Hartley (2023).
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