Equity, Mortgage & Hybrid REITs
⚠️ Collection note: This chapter page contains no distribution/income requirement percentages (e.g., no 75%/90%/95% figures) and no taxation section. The page was searched for those terms in both rendered text and underlying HTML and none exist. Nothing has been added from outside the page. If your study plan expects REIT distribution percentages or conduit/pass-through taxation, that material lives elsewhere in the Achievable materials, not on this page.
What a REIT is
- Real estate investment trusts (REITs) are similar to mutual funds in the sense that they pool investor money to buy a portfolio of assets.
- ⚠️ The key difference: REITs invest specifically in real estate-related assets — even though they aren’t technically mutual funds.
- Legally structured as trusts, a typical REIT portfolio holds commercial properties, commercial mortgages, or both.
- Most REIT units are sold by the issuer during an initial public offering (IPO) and then trade in the secondary market. However, some REITs are never publicly offered.
- 📌 A trust is a specific type of account created to hold and manage assets for a beneficiary. REITs hold and manage assets for their investors (the beneficiaries of the REIT). Trusts are covered later in the Achievable materials.
🔑 Equity vs. mortgage vs. hybrid REITs
| REIT type | What it invests in | How it earns returns | Return profile |
|---|---|---|---|
| Equity REIT | Invests directly in real estate properties; typically focuses on commercial real estate — common holdings such as strip malls, condominiums, and office buildings | 1) Lease income — if a REIT owns dozens or hundreds of properties, it can rent out space and collect lease payments. 2) Property sales (capital appreciation) — if property values rise, the REIT’s value can increase; gains may remain unrealized (property isn’t sold), or the REIT can sell a property to realize capital appreciation (buy low, sell high) for investors | Income (from leases) AND capital appreciation potential |
| Mortgage REIT | Buys and offers mortgages on commercial properties — does not own real estate directly | Earns income from the mortgages it owns or originates. When a REIT purchases or offers a mortgage, the property owners make their monthly mortgage payments to the REIT — functioning much like a bank for many corporations | Primarily seeks income |
| Hybrid REIT | A combination of real estate properties and mortgages | Investors may receive returns through capital appreciation, plus income from leases and mortgage payments | Combination of equity and mortgage REIT characteristics |
- ⚠️ Exam trap: only equity REITs (and hybrids, by extension) offer capital appreciation potential. Mortgage REITs primarily seek income. All REITs provide income potential.
Utilizing REITs as a hedge
- REITs offer a straightforward way to invest in real estate and diversify a portfolio.
- Unlike direct real estate transactions — which often involve brokers, inspections, and negotiations — most REITs can be bought and sold in the secondary market much like stock.
- 📌 With the exception of the Great Recession from 2007–2009, real estate has typically acted as a hedge against market downturns. When stock market values fall, real estate has often held its value better and can help counterbalance losses.
Definitions
| Term | Definition | Example |
|---|---|---|
| Hedge | Something used to minimize risk or protect | Real estate (via REITs) has typically acted as a hedge against stock market downturns |
How REITs are traded and regulated
There are three general types of REITs available to investors:
- Public listed REITs
- Public non-listed REITs
- Private REITs (unregistered, non-listed)
| REIT category | Listed on a national exchange (e.g., NYSE)? | Where it trades | SEC registration | Liquidity risk |
|---|---|---|---|---|
| Public listed REIT | Yes — many of the most widely traded REITs are exchange-listed | National exchange | Registered | Lowest of the three |
| Public non-listed REIT | No | Still trades in the secondary market, i.e., the over the counter (OTC) markets | Registered/public offering | More liquidity risk than listed REITs |
| Private REIT (unregistered, non-listed) | No | Not available to the public; typically sold through private transactions between willing participants (often sophisticated investors or institutions) | Exempt from SEC registration — offered only to private audiences | High level of liquidity risk |
- ⚠️ Two of the three types are non-listed: public non-listed REITs and private non-listed REITs. Non-listed means they aren’t listed on national exchanges (like the NYSE).
- When a security doesn’t trade on an exchange, it trades in the over the counter (OTC) markets. OTC markets are generally less active than exchanges, which can increase liquidity risk.
- Securities are exempt from many regulations and government oversight (primarily from the SEC) when they aren’t offered publicly.
- 📌 Later, the materials cover Regulation D, the private placement rule. In practice, Regulation D is a common way to sell a security to a limited group of wealthy individuals and institutions without registration (which can be costly and time-consuming). Private REITs are often purchased through private placements.
- Because private REITs aren’t registered with the SEC, investors generally can’t liquidate them in public markets.
Suitability
| Point | Detail |
|---|---|
| Who they suit | Investors who want to diversify and gain exposure to real estate |
| Hedge value | Real estate has often acted as a hedge against stock market declines |
| Convenience | For investors who want real estate exposure without the operational challenges of owning property directly, REITs can be an alternative |
| Risk retained | REITs still carry real estate market risk, which can lead to significant losses (for example, the collapse of the real estate market in 2008) |
| Unlisted & private REITs | Generally subject to greater liquidity risk. Investors who may need quick access to their funds typically shouldn’t invest in these REIT types |
| Appropriate audience for unlisted/private | Generally appropriate only for wealthy (sophisticated) retail investors or institutional investors who can tolerate these risks |
Key points
Real estate investment trusts (REITs)
- Invest directly in commercial real estate properties and mortgages
- Negotiable securities
Equity REITs
- Invest directly in commercial real estate properties
- Income (from leases) and capital appreciation potential
Mortgage REITs
- Invest directly in commercial real estate mortgages
- Primarily seek income
Hybrid REITs
- Combination of equity and mortgage REIT
- Invest directly in commercial real estate properties and mortgages
Non-listed REITs
- Trade solely in the OTC markets
- Can be subject to liquidity risk
Private REITs
- Offered to select investors
- Avoids SEC oversight
- High level of liquidity risk
REIT suitability
- Provides a hedge to the stock market
- All REITs provide income potential
- Equity REITs provide capital appreciation potential
- Add diversification to portfolios
- Unlisted and private REITs only suitable for sophisticated investors due to liquidity risk
Sources
Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.
| # | Source | Publisher |
|---|---|---|
| 1 | REITs investor bulletin — types, listing, distributions | SEC |
| 2 | Regulated investment company (Subchapter M) definition | Cornell LII (26 U.S.C. 851) |
| 3 | Investment product categories | SEC / Investor.gov |
| 4 | Achievable Series 65 — chapter 1.3.7 | Achievable (course text) |
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