There are three types of REITs:

1. Equity REITs. Most REITs are equity REITs, which own and manage income-producing real estate. Revenues are generated primarily through rents (not by reselling properties).
2. Mortgage REITs. Mortgage REITs lend money to real estate owners and operators either directly through mortgages and loans, or indirectly through the acquisition of mortgage-backed securities. Their earnings are generated primarily by the net interest margin—the spread between the interest they earn on mortgage loans and the cost of funding these loans. This model makes them potentially sensitive to interest rate increases.
3. Hybrid REITs. These REITs use the investment strategies of both equity and mortgage REITs.

REITs pay above-average dividend yields. It has a lot of pros as well as cons. Let’s see what includes.

Pros

• Liquidity
• Reliable
• Transparent
• Stable
• Attractive risk-adjusted returns

Cons

• Low growth
• Dividends are taxed as regular income
• Subject to market risk
• Potential for high management and transaction feed