Real Estate Investment Trusts (REITS)
A real estate investment trust, known as a REIT, is a company that owns income-producing property. As a small investors, you can purchase shares of a REIT (if they are publicly traded) through an ETF or mutual fund.
There are several types of REITS. Two of the most common are Equity REITS and Mortgage REITS.
Equity REITs own and manage income-producing real estate. The model for these REITS is to buy properties (i.e. office buildings, retail centers, hotels) and lease those properties to tenants. The REIT should make money from the rent and also from the appreciation of property values.
Mortgage REITs are based on mortgage-backed securities. The mortgage REIT borrows money at a low short-term interest rate and purchases mortgages that have a higher longer-term interest rate. The difference between the two sets of interest rate is the profit the REIT makes.
Generally, Equity REITs are less volatile than mortgage REITs, since they invest in long term property acquisition.