Mortgage REITs

Mortgage REITs or mREITs allow you to invest in mortgages and mortgage-backed securities.

A real estate investment trust, or REIT, is a special type of corporation. Its primary business is investing in real estate and related assets. To be classified as a REIT, a corporation needs to meet a few basic criteria. REITs must

• invest at least 75% of assets into real estate or related assets,
• derive at least 75% of their income from real estate sources,
• have at least 100 shareholders,
• be no more than 50% owned by five shareholders, and
• pay out at least 90% of their taxable income to shareholders as dividends.

If it meets these requirements and a few more, a REIT enjoys a nice tax advantage: It pays zero corporate tax on its profits. REITs are pass-through entities, similar in tax treatment to a partnership or LLC.

With most dividend-paying stocks, profits are effectively taxed twice. Once when they are earned (corporate tax), and again when they’re paid out to shareholders (dividend tax). REIT profits are only taxed on the individual level. And if they’re held in a tax-advantaged retirement account, investors don’t have to worry about paying taxes on their dividends at all.

What is a mortgage REIT?

When it comes to REITs, there are two main categories — equity REITs and mortgage REITs (also known as mREITs). Equity REITs are what most people think of when they hear the term “real estate investment trust.” These companies own, manage, and develop commercial properties.

Mortgage REITs invest in mortgages, mortgage-backed securities, and related assets. According to Nareit, mortgage REITs help finance 1.8 million homes in the United States. As you might imagine, this is quite a different business than owning properties. In fact, mortgage REITs aren’t even classified in the real estate sector — they’re considered financial stocks.

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