A mortgage REIT is not the same thing as an equity REIT, and the difference is worth understanding before the yield does
A common mistake is moving money into something liquid, wanting real estate exposure with income, and screening on yield alone. REITs pay out most of their taxable income and yields tend to run higher than the broader market, so a name paying north of 11 percent with mortgage in the title looks like real estate lending, which reads as familiar territory to anyone who has been on the borrower side of construction loans. The part that catches people out is that a mortgage REIT is a leveraged spread business. It does not own buildings. It owns paper, mostly funded with short term borrowing, and it earns the difference between what the paper yields and what the funding costs. When that spread compresses or the funding market gets tight, book value takes the hit, and a dividend that looks like income is partly a return of capital. Say 60k goes into a position like this. Distributions run roughly 6,400 over about fourteen months, then the position is sold at a loss of just over 17k. Net down about 11k, and a chunk of what came in as distributions turns out to be return of capital, which changes cost basis in a way that complicates tax filing. Where it actually goes wrong is the screen. Screening on yield and sector label misses the signal in a yield above 10 percent in a sector where the index average runs 4 to 6. High yield in this space is usually the market pricing doubt about the payout, or it reflects a fundamentally different business model, and often it is both. The fix is to read what the company actually owns before looking at the dividend number. Equity REITs own income producing property and their fortunes track rents, occupancy, and supply. Mortgage REITs own loans and securities and their fortunes track rate spreads and funding availability. Both are called REITs. They are not substitutes.
