So it works like this:
1) I say "I'ma buy a bunch of apartment buildings and houses and split the rent among errbody who buys my securities." That's a Real Estate Investment Trust. Traditionally they buy commercial properties and apartment buildings but lately they're buying the house across the street.
2) For their trouble, the REIT gets to disburse the difference between "interest rate paid on the loan" and "difference between what the building costs and what the building pays", also known as the capitalization rate or "cap rate". I looked at some apartment buildings in 2009 with a cap rate at like 17%. Here's one at 2.85%.
It should be that simple except
3) Commercial real estate loans are f'n weird, man. Typically you have a 5-year or 10-year term with a 20-year or 30-year maturation which means, yes, after the term is up you have paid nothing but interest and now you need to refinance or pay off some giant balloon payment. This is typical because most commercial buildings are either paid off (by their owners) or sold (by their investors) prior to the term expiring. If they sell, take their profits and roll it into another commercial mortgage they pay no capital gains thanks to the commercial mortgage carryover, a blatantly obvious sop to rich people that poor people don't know enough about. All the discussion I can find about it is behind paywalls I don't pay for.
Commercial rates are usually a point or two above residential rates. Apartment loans have gone from 3% to 5% in the past two months and they're gonna go higher. And your new loan, to refi your old loan or replace your old building with a new one, is going to be more than your cap rate.
And you will eat shit.
And so will your shareholders.