Equity REITs vs Mortgage REITs: Which REIT Type Builds More Wealth?

For more on REIT investing, see our guides on best REITs to buy now and REIT diversification strategies.

Key Takeaways

• Equity REITs own property; Mortgage REITs own debt. This fundamental difference drives all performance and risk characteristics.
• Equity REITs have outperformed historically with 10.3% annual returns over 20 years vs. 7.1% for mREITs.
• Mortgage REITs offer higher yields (10-14%) but with much greater volatility and dividend instability.
• Interest rate sensitivity differs sharply: mREITs are acutely harmed by rising rates, while equity REITs have partial natural hedges.
• Leverage is the key differentiator: mREITs use 5-8x leverage, amplifying both gains and losses.
• For most investors, equity REITs should form the core of any REIT allocation, with mREITs as a tactical satellite position.

Frequently Asked Questions

Question: What is the main difference between equity REITs and mortgage REITs? Equity REITs own and operate physical real estate properties, generating income from rent and property appreciation. Mortgage REITs invest in real estate debt (mortgages and MBS), earning income from interest rate spreads. Equity REITs are generally less risky and more suitable for long-term investors.

Question: Which REIT type pays higher dividends? Mortgage REITs typically pay significantly higher dividends, with yields often ranging from 8% to 14%, compared to 3% to 6% for equity REITs. However, mREIT dividends are less stable and more frequently cut during market stress.

Question: Are mortgage REITs riskier than equity REITs? Yes. Mortgage REITs have higher volatility (standard deviation of 22.8% vs. 16.2% for equity REITs over 10 years), greater interest rate sensitivity, and higher leverage (5-8x). They experienced a 58.2% loss in 2008 compared to 37.3% for equity REITs.

Question: How do rising interest rates affect each REIT type? Rising rates typically hurt both, but mortgage REITs are more severely impacted because their fixed-rate MBS portfolios lose value. Equity REITs can partially offset rate increases through rent growth. mREITs can lose 8-12% of book value per 100-basis-point rate increase.

Question: Can I invest in both equity and mortgage REITs through ETFs? Yes. For equity REITs, the Vanguard Real Estate ETF (VNQ) with 0.12% expense ratio is the largest. For mortgage REITs, the iShares Mortgage Real Estate Capped ETF (REM) with 0.48% expense ratio provides diversified exposure. A 70/30 split favoring equity REITs is a common starting point.

Question: Which REIT type performed better in 2022 when rates rose sharply? Both performed poorly, but equity REITs fared slightly better with a -24.5% return versus -31.7% for mortgage REITs. Equity REITs benefited from rent growth in apartments and industrial properties, while mREITs saw book values collapse as the Fed raised rates by 425 basis points.

This article is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Always consult with a qualified financial advisor before making investment decisions. REITs carry specific risks including interest rate sensitivity, market volatility, and property sector concentration.

For further reading, explore our articles on REIT tax advantages, commercial real estate investing, and dividend investing strategies.