Are Mortgage REITs Safe?

Individual company strategies differ, but the riskiest aspect of investing in mortgage REITs is usually interest rates.

These businesses borrow money at cheaper short-term rates in order to purchase mortgages with periods of 15 or 30 years. If short-term interest rates stay the same or fall, this strategy works. However, if short-term borrowing rates rise, mortgage REIT profit margins could quickly collapse.

Are mortgage REITs a good investment?

Mortgage Real estate investment trusts, or REITs, play an important role in the economy by facilitating the housing market. There would be significantly less liquidity in the business without mREITs, making it more difficult for borrowers to secure financing options.

Can you lose all your money in REITs?

  • REITs (real estate investment trusts) are common financial entities that pay dividends to their shareholders.
  • One disadvantage of non-traded REITs (those that aren’t traded on a stock exchange) is that investors may find it difficult to investigate them.
  • Investors find it difficult to sell non-traded REITs because they have low liquidity.
  • When interest rates rise, investment capital often flows into bonds, putting publically traded REITs at danger of losing value.

Are REITs considered high risk?

Because REITs are listed on the stock market, they carry the same risks as equity investments. Outside impulses, underlying fundamentals, and a number of other market dynamics all influence real estate values. REITs, in turn, will reflect any downturn and the resulting pricing repercussions.

Although long-term returns on REITs can be substantial, there have been times when they have not. The price of shares in the iShares Dow Jones U.S. Real Estate ETF (IYR) plunged 72 percent from a peak of $91.42 to a low of $23.51 as the real estate bubble burst between early 2007 and early 2009.

Why are REITs a bad investment?

Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.

The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.

Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.

REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.

Why do mortgage REITs pay high dividends?

Residential mortgage loans or pools of mortgage loans generated by qualifying financial institutions are purchased by these organizations. To be purchased, the mortgages must meet particular lending standards and other factors.

These mortgages are packaged by Fannie Mae, Freddie Mac, and Ginnie Mae into agency mortgage-backed securities, or MBS. Because the principal and interest paid by homeowners are passed on to the holders of mortgage-backed securities, these bonds are referred to as “pass-through securities.” The payment of the principal and interest on the mortgages that make up the agency mortgage-backed securities is guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.

According to sifma, there were $8.1 trillion in outstanding US agency mortgage-backed securities as of September 30, 2020.

Fannie Mae, Freddie Mac, and Ginnie Mae all issue interest-bearing bonds known as agency securities in addition to mortgage-backed securities. The proceeds from these bonds are used to fund the agencies’ operations as well as to purchase mortgages that are later included in mortgage-backed securities.

Investors presume the US government will guarantee the performance of these bonds if Fannie Mae, Freddie Mac, or Ginnie Mae run into financial difficulties, therefore these three agencies can issue debt at extremely low yields. During the Great Financial Crisis of 2008 and 2009, this assumption proved right, as the US government did indeed offer financial support to these organizations, preventing their bonds from defaulting.

Non-Agency Mortgage-backed Securities

Non-agency mortgage-backed securities are also packaged by private issuers from pools of mortgages. To protect holders from defaults on the underlying mortgages, non-agency mortgage-backed securities may include insurance or other credit enhancements.

According to sifma, there were $1.3 trillion in non-agency mortgage-backed securities outstanding as of September 30, 2020.

Can you get rich investing in REITs?

There is no such thing as a guaranteed get-rich-quick strategy when it comes to real estate equities (or pretty much any other sort of investment). Sure, some real estate investment trusts (REITs) could double in value by 2021, but they could also swing in the opposite direction.

However, there is a proven way to earn rich slowly by investing in REITs. Purchase REITs that are meant to grow and compound your money over time, then sit back and let them handle the heavy lifting. Realty Income (NYSE: O), Digital Realty Trust (NYSE: DLR), and Vanguard Real Estate ETF are three REIT stocks in particular that are about the closest things you’ll find to guaranteed ways to make rich over time (NYSEMKT: VNQ).

How often do REITs fail?

Historically, buying REITs following a market crisis has always been a smart move, and we have little doubt that this time will be no different. REITs, on the other hand, aren’t “ideal investments.” In truth, there are numerous ways for a REIT investor to lose money. Over the last 20 years, REITs have returned 15% a year, according to NAREIT.

Which is better Agnc or nly?

NLY is a real estate investment company that invests in both residential and commercial properties.

Agency mortgage-backed securities, non-agency residential mortgage assets, and residential mortgage loans are all examples of these.

The REIT also invests in commercial real estate investments such as mortgage loans and securities, which it creates. Finally, they provide private equity-backed funding to medium market enterprises.

NLY is even more appealing than AGNC in terms of dividend yield, since its future yield is a stunning 9.6%.

However, the predicted payout ratio of 84 percent in 2021 is far less cautious, and the book value per share growth of only 0.3 percent in Q1 is significantly lower than AGNC’s.

On the plus side, NLY’s earnings stream is more diversified – and thus potentially more steady – than many of its mortgage REIT competitors.

As a result, their current earnings-per-share and dividend-per-share levels are considerably more likely to be sustainable in the near future, implying that their total return prospects are favorable.

Overall, NLY’s income yield appears to be quite safe and appealing. Meanwhile, its growth prospects are dim, but not as bleak as those of some other mortgage REITs.

Overall, the stock’s total return potential is in the mid-to-high single digits, making it a good income investment.

What does Dave Ramsey say about REITs?

Do you want to know more details? Here’s a rundown of some typical investment possibilities, as well as Dave’s thoughts on them—both positive and negative.

Mutual Funds

Mutual funds allow you to invest in a variety of businesses at simultaneously, ranging from the largest and most stable to the newest and fastest-growing. They have teams of managers who, depending on the fund type, select companies for the fund to invest in.

So, why does Dave propose this as the only investing option? Dave prefers mutual funds because they allow him to diversify his investment across a number of companies, avoiding the risks associated with single equities like Dogecoin. Mutual funds are an excellent alternative for long-term investing since they are actively managed by professionals who strive to identify stocks that will outperform the stock market.

Exchange-Traded Funds

ETFs are collections of single stocks that are designed to be traded on stock exchanges. ETFs do not employ teams of managers to select firms for investment, which keeps their fees cheap.

Because ETFs allow you to swap investments quickly and easily, many people try to play the market by buying cheap and selling high, but this is extremely difficult to do. Dave favors a buy-and-hold strategy, which entails holding on to investments over time and maintaining a long-term perspective rather than selling on the spur of the moment when the market falls.

Single Stocks

Your investment in a single stock is contingent on the performance of that firm.

Dave advises against buying single stocks since it’s like putting all your eggs in one basket, which is a large risk to take with money you’re dependent on for your future. If that company goes bankrupt, your savings will be lost as well. No, thank you!

Certificates of Deposit (CDs)

A certificate of deposit (CD) is a form of savings account that allows you to store money for a predetermined period of time at a fixed interest rate. Withdrawing money from a CD before its maturity date incurs a penalty from the bank.

CDs, like money market and savings accounts, have low interest rates that do not keep pace with inflation, which is why Dave advises against them. While CDs are helpful for putting money down for a short-term purpose, they aren’t suitable for long-term financial goals of more than five years.


Bonds are a type of debt instrument that allows firms or governments to borrow money from you. Your investment earns a predetermined rate of interest, and the company or government repays the debt when the bond matures (aka the date when they have to pay it back to you). Bonds, like stocks and mutual funds, rise and fall in value, although they have a reputation for being “safe” investments due to less market volatility.

However, when comparing investments over time, the bond market underperforms the stock market. Earning a set interest rate will protect you in poor years, but it will also prevent you from profiting in good years. The value of your bond decreases when interest rates rise.

Fixed Annuities

Fixed annuities are complicated plans issued by insurance firms that are designed to provide a guaranteed income in retirement for a specific period of years.

Dave doesn’t advocate annuities since they can be costly and come with penalties if you need to access your money during a set period of time. You might be wondering what a designated surrender period is. That’s the amount of time an investor must wait before being able to withdraw funds without incurring a penalty.

Variable Annuities (VAs)

VAs are insurance products that can provide a steady stream of income and a death payment (money paid to the beneficiary when the owner of the annuity passes away).

While VAs provide an additional tax-deferred retirement savings option for those who have already maxed out their 401(k) and IRA accounts, you lose a much of the growth potential that comes with mutual fund investing in the stock market. Furthermore, fees can be costly, and VAs impose surrender charges (a penalty price you must pay if you withdraw funds within the surrender period).

Real Estate Investment Trusts (REITs)

REITs are real estate investment trusts that own or finance real estate. REITs, like mutual funds, sell shares to investors who want to share in the profits generated by the company’s real estate holdings.

Dave enjoys real estate investing, but he prefers to invest in cash-flowing properties rather than REITs.

Cash Value or Whole Life Insurance

Whole life insurance, often known as cash value insurance, is more expensive than term life insurance but lasts your entire life. It’s a form of life insurance product that’s frequently promoted as a means to save money. That’s because insurance is also attempting to function as an investing account. When you get whole life insurance, a portion of your “investment” goes into a savings account within the policy.

Sure, it may appear to be a nice idea at first, but it is not. The kicker is that when the insured person dies, the beneficiary receives only the face value of the insurance and loses any money that was saved under it (yes, it’s pretty stupid).

Dave only advises term life insurance (life insurance that protects you for a specific length of time, such as 15–20 years) with coverage equivalent to 10–12 times your annual income. If something occurs to you, your salary will be compensated for your family. Don’t know how much insurance you’ll need? You can use our term life calculator to crunch the numbers.

Separate Account Managers (SAMs)

SAMs are third-party investment professionals who purchase and sell stocks or mutual funds on your behalf.

Simply say, “No thanks, Sam,” to this option. Dave chooses to put his money into mutual funds that have their own teams of competent fund managers with a track record of outperforming the market.

Are REITs a good investment Dave Ramsey?

Let’s get one thing out of the way right away: Mortgage REITs are a bad investment. They acquire debt with debt, and they’re so dangerous that you shouldn’t be within 50 miles of one. When interest rates rise, what happens? You have a financial loss. What happens if a homeowner defaults on their mortgage payments? A REIT is likely to be able to withstand the default of one or two homeowners. But what if we end up in a situation like the one that occurred in 2008, when millions of people lost their homes? Forget about it.

Mortgage REITs are a bad investment. They acquire debt with debt, and they’re so dangerous that you shouldn’t be within 50 miles of one.

Equity REITs are less hazardous, and there are a few that can match the performance of outstanding growth stock mutual funds. In general, however, if you’re going to invest in real estate, you should just purchase it. When you invest in a REIT, you have no say in the properties they buy, how they’re managed, or what decisions they make about those assets.

If you want to invest in real estate, you should just acquire it. When you invest in a REIT, you have no say in the properties they buy, how they’re managed, or what decisions they make about those assets.

It’s hardly rocket science or brain surgery to figure out that a REIT isn’t the ideal investing option for you.

Are REITs good long-term investments?

REITs are investments that provide a total return. They usually provide significant dividends and have a moderate chance of long-term financial appreciation. REIT stocks have long-term total returns that are comparable to value equities and higher than lower-risk bonds.