How do Mortgage REITs primarily generate income?

Mortgage REITs generate income primarily by providing mortgages and investing in mortgage-backed securities. They function differently from equity REITs, which acquire and manage physical real estate properties. Instead, mortgage REITs focus on providing financing for income-producing real estate by either originating loans or purchasing existing mortgage loans and securities that are backed by these loans.

When mortgage REITs invest in mortgage-backed securities, they earn income from the interest payments made by the borrowers on the underlying mortgages. This can create a stable cash flow, as the yield from these interest payments often exceeds the cost of borrowing that the REIT incurs, enabling them to profit from the spread between the two rates.

In contrast, buying physical properties directly, collecting rental income, or charging management fees are typical activities associated with equity REITs or property management firms, not mortgage REITs. Understanding the distinction between these types of real estate investment trusts is crucial for anyone studying or working in the real estate investment field.