Introduction
Real estate investment trusts (REITs) may seem promising investment options, but it comes with their fair share of problems. From lack of control over your investment to the risk of poor management and market volatility affecting returns, worry not here are some possible solutions to make real estate investments more secure and profitable.
What are REITs?
REITs, or Real EstateInvestment Trusts, are investments vehicle that allows individuals to invest in real estate without actually owning the physical properties. Sound like a dream come true, but not so fast. While REITs may seem like a convenient way to dip your toes into the world of real estate investments, they come with their fair share of drawbacks.
REITs are a company that owns and operates income-generating properties, such as apartment buildings, shopping malls, and office spaces. Investors can buy shares in these REITs and receive a portion of the rental income generated by the properties. So basically, you're investing in a company that invests in real estate.
The Problem with REIT Investments
One of the main problems with REIT investments is the lack of control. When you invest in a REIT, you'regiving up controlover the specific properties in which your money is being invested.
Another issue is the risk of poor management. Since you're not directly managing the properties, you're relying on the REIT company to make decisions and effectively manage the properties. All REITs are created equal. Some may have stellar management teams, while others may have a knack for making poor investment choices.
Lastly, we can't forget the impact of market volatility on REIT investments. Just like any other investment, REITs are subject to market fluctuations. When the real estate market takes a nosedive, so will the value of your REIT shares. And nobody wants to see their investments plummet faster than the speed of light, right?
Possible Solutions for Real Estate Investments
First, let's talk about the lack of control over your precious investment. When you invest in a REIT, You don't get a say in which properties to invest or how it is being managed.
And while we're on the subject of management, let's not forget the risk of poor management. But what happens when the management team changes? Suddenly, your investment is at the mercy of strangers who may or may not have any hint about real estate.
There are some possible solutions to this REIT nightmare. One option is to go old school and be the owner of properties. You get complete control and can sleep peacefully. Now fate is in your own hands. Another option is real estatecrowdfunding platforms,where you can pool your funds with others to invest inspecific properties. It's like a virtual commune of real estate enthusiasts, working together to conquer the investment world.
And finally, we have real estate mutual funds. These are like the buffet of real estate investments, allowing you to diversify your portfolio and mitigate the risk of poor management and market volatility.
Remember, the real estate investment world is not for the faint of heart, but with the right knowledge and a twinkle in your eye, you just might come out on top.
Conclusion
The problem with REIT investments is the lack of control over the investment, the risk of poor management, and the market volatility affecting returns. So, what are the possible solutions for real estate investments? Direct ownership of properties, real estate crowdfunding platforms, and real estate mutual funds offer alternatives worth considering.
FAQs
Lack of liquidity. Non-traded REITs are also illiquid, which means there may not be buyers or sellers in the market available when an investor wants to transact. In many cases, non-traded REITs can't be sold for a minimum of 10 years.
Why are REITs not doing well? ›
While higher rates negatively impacted nearly every sector of the economy in 2022 and most of 2023, real estate was hit especially hard. Rising interest rates hurt not only the value of REITs' property holdings but also the cost of debt to finance those properties or even refinance already-owned assets.
What are the downsides of REITs? ›
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
What are the 3 principal risks that all REITs face? ›
Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.
What are the pros and cons of REITs? ›
Real estate investment trusts reduce the barrier to entry for investors in the real estate market and provide liquidity, regular income and other perks. However, you'll be exposed to risks that aren't inherent in the stock market and dividends are subject to ordinary income tax.
What is the conclusion of REITs? ›
Conclusion: The Potential of Equity REITs in Your Portfolio
Equity REITs offer diversification, steady income, and accessibility to larger properties - all inherent benefits to the investor. However, they also carry risks, including property depreciation and market shifts.
Why are REITs dropping? ›
This is because when interest rates rise, it becomes more expensive for Reits to borrow money to refinance their loans, resulting in an erosion of their dividends. On top of that, returns from yield products like fixed deposits and government Treasury bills were also on the rise, competing for investors' capital.
Can REITs go out of business? ›
REITs have gone through countless recessions, periods of rising interest rates, and many other crises and always made it to the other side. Many of the past crises were actually far worse than what we are experiencing today, and yet, there have been only a handful of REIT bankruptcies in our entire history.
Why are REITs bad in a rising rate environment? ›
Therefore, if rates begin to rise then REIT cash flows will decline at a time when discount rates are rising. They fear the end result will be capital losses that offset the higher distribution yield and result in negative total returns.
Do REITs do well in a recession? ›
REITs historically perform well during and after recessions | Pensions & Investments.
Lesson #1: The Dividend Should Be An Afterthought
It may sound counter-intuitive, but lower-yielding REITs have actually been far more rewarding than higher-yielding REITs in most cases. That's because REITs are total return investments, and growth and appreciation are even more important than the dividend yield.
Are REITs riskier than bonds? ›
With government bonds, the investor is a creditor of the government. Stocks and REITs are not guaranteed and have been more volatile than bonds. Stocks provide ownership in corporations that intend to provide growth and/or current income.
What is the 90% REIT rule? ›
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Are REITs safer than stocks? ›
REITs have outperformed stocks on 20-to-50-year horizons. Most REITs are less volatile than the S&P 500, with some only half as volatile as the market at large. Several individual REITs delivered significantly higher returns than the S&P 500.
Why are REITs a hedge against inflation? ›
REITs provide natural protection against inflation. Real estate rents and values tend to increase when prices do. This supports REIT dividend growth and provides a reliable stream of income even during inflationary periods.
Are REITs safe during a recession? ›
By law, a REIT must pay at least 90% of its income to its shareholders, providing investors with a passive income option that can be helpful during recessions. Typically, the upfront costs of investing in a REIT are low, while their risk-adjusted returns tend to be high.
Do REITs go down in a recession? ›
REITs historically perform well during and after recessions | Pensions & Investments.
Do REITs have a lot of debt? ›
Since REITs buy real estate, you may see higher levels of debt than for other types of companies. Be sure to compare an REIT's debt level to industry averages or debt ratios for competitors.
Do REITs have inflation risk? ›
REIT investors have an expectation that a REIT's dividends will keep up with inflation. Historically, this has worked well. However, we can't forget, at least for publicly-traded REITs, that they are still traded like stocks. As interest rates rise, they can depress the price of these REITs.
