A Complete Guide To Mortgage REITs (mREITs) (2024)

FAQs

What is the 75 75 90 rule for REITs? ›

Invest at least 75% of its total assets in real estate. Derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate. Pay at least 90% of its taxable income in the form of shareholder dividends each year.

The two main types of REITs are equity REITs and mortgage REITs, commonly known as mREITs. Equity REITs generate income through the collection of rent on, and from sales of, the properties they own for the long-term. mREITs invest in mortgages or mortgage securities tied to commercial and/or residential properties.

MREIT's dividend yield of 5.65% for the fiscal year of 2022 is highly attractive that provides upside to IPO investors because of the high quality and fast-growing portfolio that it offers. By the fiscal year 2023, this can even grow to 6.1%.

How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.

In situations where all investors submit cash election forms, the dividend payout formula will result in all shareholders receiving their distribution as 20% cash and 80% stock, which means that the cash/stock dividend strategy functions analogously to a pro rata cash dividend coupled with a pro rata stock split.

When investing only in REITs, individuals incur more risk than when they are part of a diversified portfolio. REITs can be sensitive to interest rates and may not be as tax-friendly as other investments.

Mortgage REITs (mREITs) were among the worst-performing REIT subsectors during 2022 and 2023 when the Federal Reserve raised interest rates. However, several mREITS have performed much better since the Federal Reserve paused its rate hikes in June 2023 and later began discussing the possibility of rate cuts in 2024.

A mortgage REIT investment generates revenue through interest income from mortgages and mortgage-backed securities. Equity REITs are able to provide a more stable income. But mortgage REITs can often offer higher dividend yields, especially with rising interest rates.

Mortgage REITs typically fund relatively short-term loans with floating coupons that are designed to either improve or stabilize commercial properties. They and, more specifically, their borrowers were walloped as interest rates spiked and commercial property markets turned against them.

What happens to mortgage REITs when interest rates go down? ›

Prepayment risk increases when interest rates fall because more homeowners decide to refinance their mortgages. Conversely, when interest rates rise, mortgage REITS could benefit from early mortgage payoffs because the payoff amount received could be greater than the current price of the mortgage within the MBS.

Can You Lose Money on a REIT? As with any investment, there is always a risk of loss. Publicly traded REITs have the particular risk of losing value as interest rates rise, which typically sends investment capital into bonds.

Is Five Years the Standard "Hold" Time for a Real Estate Investment? Real estate investment trusts (REITS) and other commercial property investment companies frequently target properties with a five-year outlook potential.

If the amount the REIT receives as rent depends on the net profits of a tenant or subtenant, or if the REIT receives interest income that depends on the net profits of the borrower (in both cases, gross rents are fine), all such rent or interest, as applicable, can fail to qualify as good income for purposes of the ...

For each tax year, the REIT must derive: at least 75 percent of its gross income from real property-related sources; and. at least 95 percent of its gross income from real property-related sources, dividends, interest, securities, and certain mineral royalty income.

A REIT cannot be closely held. A REIT will be closely held if more than 50 percent of the value of its outstanding stock is owned directly or indirectly by or for five or fewer individuals at any point during the last half of the taxable year, (this is commonly referred to as the 5/50 test).

In order to meet the 75% test, at least 75% of a REIT's gross income must be derived from the following: Rents from real property. Interest on obligations secured by mortgages on real property or on interests in real property. Gain from the sale or other disposition of real property.

“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.