The 7% Solution: You CAN Afford a Comfortable Retirement by John Graves.

How Do Mortgage REITS Work?

Here is as exerpt of the Video How Do Mortgage RIETs Work? by The Retirement Journal Editor and Author of The 7% Solution: You CAN Afford a Comfortable Retirement, John Graves.

This is John Graves, editor of www.Theretirementjournal.com and author of "The Seven Percent Solution". You can afford a comfortable retirement.

Today our question is how do mortgage REITs work.

As you may know REIT stands for Real Estate Investment Trust, it's a publicly traded stock that owns or lends money to real estate. Equity real estate REITs own the property outright.

They're by far the most common form of REITs.

Mortgage REITs, in the minority, are a different breed. They are, if you will, the bank. Mortgage REITs take in shareholder's money, capital, typically leverage it 2, 3, 4 or 5 times by borrowing and then use that money and lend it to companies or individuals or institutions who want to buy commercial real estate.

They receive the income, the interest income on their loans and any administration fees they may charge and they pay the interest, the carry costs on the loans that they have taken out. The difference between their carry costs and the interest received, if its positive is net to the investor.

Therefore, mortgage REITs are designed to give off income. During today's very low interest rate environment, it's very easy for mortgage REITs to make money because they're borrowing at 2, 3 or 4% and lending out at 4, 5, 6 or 7%. That difference is how they make money and how they share it with you. In addition, because they are so heavily leveraged, 3, 4, 5 times, their returns are enhanced. Therefore, many people look at mortgage REITs as significant income generators, particularly for folks who are retired and need to receive income from their portfolios.

However, mortgage REITs have at least four different levels of risk that are inherent in their structure and in the marketplace.

Their first risk is obviously interest rate risk.

As interest rates go up and as their carrying costs of capital go up, their spread may decline. As their spreads decline they make less profit and therefore, you receive less income potentially.

Their leverage risk is a component of interest rate risk because they're borrowing at 3, 4, 5 times what is invested.

As interest rates go up, they are inversely impacted on their income. Mortgage REITs income will decline precipitously if interest rates increase. That's a significant secondary risk.

The default risk is the third risk.

Most of these properties are either commercial or in many cases, residential properties and right now residential homes' default rate is about 9% nationwide. So if they're lending money on a residence and that person can't make his mortgage, that mortgage is not being serviced, interest is not being received and therefore the mortgage REIT income declines.

The fourth risk is origination risk. In the residential real estate market if the owner of the property is no longer making his payments, he defaults, eventually he is evicted and the cost of that eviction to the mortgage is now receiving 0 income on their loans, 0 income on their capital invested.

So each of these four levels of risks can significantly impact the value of the mortgage REIT as well as the interest income that they pay out. Thank you.

Read more: Video: How Do Mortgage REITs Work? | eHow.com http://www.ehow.com/video_12199676_mortgage-reits-work.html#ixzz2RgAxMSHu

In conclusion: Mortgage REITs just like any other real estate investment have some risks involved.  However, they have by far the best returns possible.  And considering that Mortgage Interest Rates charged in Mexico are a lot higher than those charged in the USA or Canada, the investing in a Mortgage REIT in Mexico makes your investment return much more profitable.

Contact us for further info.

 Mexico Realty Solutions
Mortgages "R" Us
Enrique (Henry) Saldana
Off: (984) 147-1305
Cel: (984) 111-8743
Español, English, Français
moneylendingbus@hotmail.com
www.mexicorealtysolutions.com
www.mexicohomerealtycenter.com
http://energyefficienthomesrivieramaya.blogspot.mx/
Skype: Mexicorealestate