Equity vs. Mortgage REITs Explained

Most real estate investment trusts fall into the category of equity REITs. These function much like traditional landlords, as they own, manage, and often develop income-generating properties such as shopping centers, office spaces, or apartment complexes.

They generate revenue by leasing out these properties and collecting rent. A significant portion of this rental income is then distributed to shareholders as dividends. This steady income stream makes equity REITs particularly attractive to investors seeking regular returns, especially those approaching retirement who prioritize income over growth.

In general, equity REITs tend to provide relatively high dividend yields in today’s low-interest-rate environment. Additionally, because they are tied to physical assets, they are often considered a partial hedge against inflation.

In contrast, mortgage REITs (mREITs) do not own physical properties. Instead, they invest in real estate debt, such as mortgages and mortgage-backed securities, earning income from the interest generated by these financial instruments.

Their business model closely resembles that of financial institutions, as they profit from the difference between borrowing and lending rates. Because of this structure, their performance is highly sensitive to fluctuations in interest rates.

Over the long term, equity REITs have generally delivered stronger returns compared to mortgage REITs.

Private vs. Public REITs

The most widely available REITs are those that are publicly traded. These operate similarly to regular stocks, meaning investors can buy and sell shares on stock exchanges through brokerage accounts.

There are over 200 publicly listed REITs in the United States alone. For instance, an investor based in the UK who wants exposure to U.S. REITs—such as Realty Income Corporation or National Retail Properties—would need access to U.S. markets like the New York Stock Exchange through their broker.

On the other hand, private REITs are not listed on public exchanges. This lack of listing means they are significantly less liquid, making it harder for investors to enter or exit positions. Moreover, since they cannot easily raise funds from public markets, their growth potential may be more limited. Historically, these limitations have resulted in private REITs underperforming their publicly traded counterparts.