We all need some bonus income throughout our retirement. Wouldn’t it be nice to have an extra $200 to $400 arriving in our checking account every month?
Mortgage Real Estate Investment Trusts (mREITs) make great sources of bonus income. Of all the types of income investing products, mREITs are the toughest to master.
Welcome back to the Income for Retirement Series (Preferred Shares, Closed-End Funds), where we aim to keep the cash flowing at all times.
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What are mortgage REITs? mREITs are a unique type of Real Estate Investment Trust that invests in Mortgage-Backed Securities (MBS) instead of directly owning properties.
When you buy your home and start a mortgage, your bank will eventually sell it to a third party that will bundle it with other mortgages.
We call this bundle of mortgages a Mortgage-Backed Security. An MBS acts as a bond. The US Government backs most mortgages (through Fannie Mae and Freddie Mac) as long as they conform to their guidelines.
These government-backed MBS carry the full weight of the US government, so they trade very closely with US Treasuries.
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Understanding the relationship between MBS and Treasuries is the key to investing in mREITs. I recommend reading “The Bond Book” to grasp this vital connection between these two bond products.
mREITs invest in MBS to help keep liquidity in the mortgage pool because banks cannot support holding mortgages for long periods.
Why choose mREITs? mREITs use massive leverage (loans) to buy tons of MBS. They borrow money cheaply and purchase MBS that yields more than their debt.
They use leverage to build out-sized returns and yields. It’s not uncommon for mREITs to yield 10-14% in dividends.
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However, these high yields come at the cost of stability. Investors value REITs on their book value.
Since mREITs hold MBS, which are bonds, their book value derives from the price of bonds. Therefore, mREITs are highly sensitive to bond prices and interest rates.
Prices and yields have an inverse relationship. If an mREIT is holding bonds at 3% and the Federal Reserve sets rates to 5%, the prices of those bonds will decrease—along with book value.
All this is to say that the prices of your mREITs will fluctuate wildly. Ideally, you understand when to invest in mREITs because of treasury rates, bond yields, and mortgage rates.
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However, timing the market is difficult, and most people will fail. So you want to invest in mREITs, understanding that the yield is more vital than the price—at least for you.
Investing in mREITs during retirement. Most retirees care solely about capital preservation; I care about income.
To preserve capital, I use my emergency fund to buffer between the markets and pay my bills. However, to beat inflation, I need high-yielding products.
I love mREITs because I can find fantastic deals if I am willing to sacrifice some security. You may discover mREITs that yield over 16%.
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However, in the short term, they may need to cut their dividend because interest rates are moving higher.
If you can wait, you’ll have a value play once interest rates move downward. Most people don’t take this long-term vision of investing.
I like to pair my mREITs with closed-end funds and index funds. My index funds provide growth and closed-end funds income.
The mREITs give me solid income that I can use to make extra purchases or luxury items. mREITs are there to brighten up your days.
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My favorite mREITs. The two biggest mREITs are AGNC (AGNC) and Annaly Capital (NLY). They both invest in government-backed MBS, which means there is little credit risk.
Their main disadvantage is when their book value decreases because interest rates are rising. There is a “good, better, best” time to invest in these companies, so learning these times is essential to keeping your cost basis low.
AGNC is a monthly payer which helps balance your portfolio every month. I love getting a nice pop of income around the 10th of every month.
Some mREITs, like Ares Commercial (ACRE), invest in commercial real estate. It’s good to diversify, especially if the sector is oversold.
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Putting it all together. Think of mREITs as pure MBS plays. If you understand mortgages, you can find great success with mREIT investing.
If you invest solely for the yield, your capital will decrease over time. mREITs can fit nicely in your income portfolio and supplement your dividend growth.
I like mREITs because they are companies and not funds. It’s tough to find preferred shares and closed-end funds on beginner platforms.
Sometimes, mREITs are the best source of income for platforms like Cash App and STASH. That’s why it’s vital you understand these hidden gems.
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As an income investor, you must think differently than most people. Investors flock to high-flying stocks like Tesla (TSLA) and Nvidia (NVDA).
Yes, these stocks can have a place in your growth portfolio; however, they don’t pay dividends. Therefore, you will not get a return on your investment until you sell.
With mREITs, you are slowly regaining your initial capital. For example, I have invested $5,300 in AGNC on my Dividend Debit Card (Cash App) since June 2020.
Over those three years, I have received $936 in dividends, which is 17% of my initial investment. Once I receive my initial investment, I am in an infinite return.
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Conclusion. From the outside, investing in mREITs is a complex way to earn a good yield. Investing in index funds and making an average of 9% annually may seem better.
However, as an income investor, I thrive on income. I want my retirement years to flow better than my working years.
To live my best life, I need income. Mortgage REITs exist solely to provide income to investors. As your neighbors pay their mortgages, their income flows into your account.
Yes, there are best times to purchase mREITs, but you can learn to read the tea leaves. If you love income and need an infusion of money in your account, mREITs can be a great resource. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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