Best Mortgage REITs to Buy

The post Best Mortgage REITs to Buy by Kevin Vandenboss appeared first on Benzinga. Visit Benzinga to get more great content like this.

There’s no question that mortgage REITs (mREITs) carry a higher level of risk than many other types of dividend stocks. However, they typically pay investors handsomely for taking that risk by offering high dividend yields. In fact, the average dividend yield for mortgage REITs is currently 15.3%

What are Mortgage REITs?

Mortgage REITs, or real estate investment trusts, are companies that invest in and manage mortgage-backed securities (MBS) and other real estate-related assets. These companies primarily focus on investing in residential and commercial mortgages, generating income from the interest payments on the loans they hold.

Mortgage REITs differ from traditional equity REITs, which primarily invest in physical properties such as office buildings, apartments, and shopping centers. Instead, mortgage REITs invest in the debt side of real estate, providing financing for property owners and earning income from the interest on those loans.

These trusts typically finance their investments through short-term borrowing at low interest rates and aim to generate income through the spread between the interest paid on the mortgages they hold and the interest paid on their borrowings. The income generated is then distributed to shareholders in the form of dividends.

Investing in mortgage REITs can offer investors the opportunity to earn high dividends, as these trusts are required to distribute a significant portion of their taxable income to shareholders. However, they also come with risks, such as interest rate fluctuations, credit risk, and changes in the real estate market. It is important for investors to carefully consider these risks and conduct thorough research before investing in mortgage REITs.

How Do Mortgage REITs Work?

Mortgage REITs purchase debt secured by real estate instead of investing in real estate directly. They generate income from the interest paid on the loans they invest in. 

You may be wondering how a mortgage REIT can pay a dividend over 7% when mortgage rates are so low. The answer is that they don’t use their own money. They use short-term loans to borrow money at extremely low rates and buy loans that are paying the higher long-term rates. Then they have to constantly refinance that short-term debt, which is where the risk comes in. 

Since mREITS typically invest in long-term loans, the interest they receive stays pretty consistent. This becomes a problem when short-term rates start to catch up with long-term rates. When this happens, the REIT’s margins get squeezed and profits tank. 

Are Mortgage REITs a Good Investment?

Mortgage REITs can be an excellent investment with high return potential. Investors just have to remember that they are an inherently high-risk investment and are extremely sensitive to interest rates.

Investing in Mortgage REITs 

Mortgage REITs can provide an excellent source of passive income for investors. However, it’s important to keep a close eye on your investments to anticipate any major change in stock price or dividends. Keep in mind that mortgage REIT stock prices are volatile. If prices drop, but overall fundamentals remain stable, you may want to take the opportunity to pick up more shares instead of selling out of panic. 

Alternative to Mortgage REITs

Another investment option that provides high yields through real estate-backed loans is Groundfloor. Groundfloor is a crowdfunding platform open to non-accredited investors that allows you to invest in short-term loans made to real estate investors and home builders. Typical returns range from 7% to 12% with terms of 6 to 12 months, and you can start investing with as little as $10.

Want to learn more about investing in REITs? See How to Invest in REITs.

Frequently Asked Questions

The post Best Mortgage REITs to Buy by Kevin Vandenboss appeared first on Benzinga. Visit Benzinga to get more great content like this.