Accredited Wealth Management Advisor Practice Exam

Which of these is an advantage of equity REITs over mortgage REITs?

1. Equity REITs retain the right to the potential appreciation of a property, but mortgage REITs retain the right to only the property's rental income.

2. Equity REITs have the right to repossess the underlying property if the mortgage REIT fails to make its mortgage payments.

3. Equity REITs can participate in the appreciation of the underlying properties.

4. Equity REITs participate in the capital gains of the mortgages, whereas mortgage REITs receive only the coupon payments.

The correct answer is: Equity REITs can participate in the appreciation of the underlying properties.

Equity REITs are primarily invested in owning and managing income-generating real estate properties, which allows them to benefit directly from the appreciation of those properties over time. This appreciation is a significant advantage for equity REITs, as it contributes to their overall value and returns to investors. In contrast, mortgage REITs focus on providing financing for income-producing real estate by acquiring or originating mortgages and mortgage-backed securities. Their returns are largely derived from the interest income on these mortgages rather than the appreciation of physical properties. While other options touch on various aspects of REITs, they do not accurately convey the core advantage of equity REITs. Options that state equity REITs have rights over the properties or capital gains on mortgages misconstrue the nature of equity and mortgage REITs, focusing instead on ownership versus financing roles without emphasizing the appreciation factor directly related to equity REITs. Therefore, recognizing that equity REITs can participate in the appreciation of the underlying properties underscores their investment strategy and potential for growth.