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REITs are closed into two categories equity REIYs and mortgage REITS.
Equity REITs: Equity REITs raise money from investors to buy real estate properties. The properties are then rented out and the REIT managers the properties like an individual real estate investor. These rentals income in then distributed to the invertors in the form of a dividend. The majority of REITs in the USA are equity REITs.
Today, real estate is tied to nearly all the economic sectors and what we do. Equity REITs shoulder a wide variety of real estate properties, including storages facilities, shopping centers, hospitals and clinics, apartments and offices.
Like all stocks, equity REITs are subject to the forces of demand and supply. You must understand the drives behind the shifts in the balance between the supply and demand of equity REITs. Since you are investing for the long term, you do not have to worry much about the short term volatility in the market.
Mortgage REITs: The next class of REITs is mortgage REITs, often called mREITS which are unique in that they do not purchase or own real estate. Instead, they great income from originated or purchased mortgages and mortgage backed securities. For instance, and mREIT lends money to a developer of apartments. They collect income in the form of interest paid on the money lent and is paid to the investors in the form of dividend. Here, and mREIT acts as a finance company for real estate developers.
Investing in mREITs means that you are toe steps removed from the actual real estate. Neither you nor the mREIT that you have invested in is directly involved with the real estate. Instead of earning rental income, mREITs receive mortgage repayments from actual real estate owners.
Since mREITs do not deal directly with real estate, they are the technical finance companies, not real estate business. As a result, you will need to evaluate their stocks as if they were finance companies like banks and insurance business and you get little to no exposure to real estate market.
