what-are-the-risks-of-real-estate-Investment trusts

What Are The Risks Of Real Estate Investment Trusts

Posted by

Real estate investment trusts are corporations that own, manage and finance properties
that generate income for their investors. They facilitate individuals from all spheres of life and
not just high net worths to invest in income-producing real estate or related assets. REITs
are equities that are used by those who want to amplify the yield of their portfolio.

what-are-the-risks-of-real-estate-Investment trusts


Investing in REITs is attractive because they allow the investors to earn dividend-based
income while not owning them directly. Like a mutual fund, REIT pools the investors’ funds
and provides the opportunity for individual investors to earn full returns and dividends, thus
helping the communities thrive and grow without buying or managing any property.


REITS investment does have high returns, but like similar assets with high returns, they too
are prone to high risks. Investors should know the pitfalls of REITs investing before making
any investment plans.
As with all investments, REIT evaluation is important to affirm if the product fits your risk
appetite and overall financial plan.

Risk Of Traded REITs

traded-reits

REITs have increased risk similar to equity investment since they are traded in the stock
market. Real estate prices depend on various external factors, fundamentals, and market
scenarios that affect the rise and fall of prices, which shadows the REITs.
Publicly traded REITs, though are safer than non-traded REITs, they are still a risk.


Risk Of Interest Rate

A rise in the interest rate is the biggest risk to REITs. It reduces the demand for REITs. When
the rate increases, investors usually opt for safer pastures like the U.S. Treasuries, which
pay a fixed rate of interest. This results in investment capital flowing into bonds since there
are REITs sell-off with rate hikes.


Selecting The Wrong REIT

Selecting the wrong REIT is also a risk in these investments. Choosing REITs, though
simple, is all about logic. One has to look into trends and do proper research before
investing in properties or holdings within the REIT. They must be sure that the real estate is
still relevant and can generate rental income.
Tax Treatment Of REIT Returns
Many of you might not consider it to be a risk, and it is still relevant nonetheless. REIT
dividends are taxed as ordinary income where the rate is similar to the investor’s income tax
rate. This is higher than the rate of dividend tax or capital gain tax for stocks.

Also Read


Risk Of Non-Exchange Traded REITs

Non-traded REITS are not traded on the stock exchange, and hence they are exposed to
special risks.


Low Liquidity

Non-traded REITs are considered non-liquid. It means there may be no buyers or sellers in
the market when an investor wants to liquefy the assets. There can be circumstances where
non-traded REIT cannot be sold for seven years, thus blocking the investment. However,
some investors can retrieve a portion of their investment after one year by paying a fee.


Value of REITs

Unlike traded REITs, it is challenging for investors to assess the value of their REITs. They
cannot do proper research on their investment. This might result in the wrong evaluation of
REITs value. Some REITs reveal the value of all the assets after 18 months of offering,
which is not a very comfortable factor.


Non-Exchange Traded REITs Distributions

Non-traded REITs pool money to buy and manage real estate. This locks the investor
money. There is a dark side to this modus operandi. Sometimes, the dividends are paid out
from other investors’ money, which otherwise should be paid from the income generated
from a property. This process restricts the cash flow for REIT and reduces the value of
shares.


Non-Exchange Traded REITs Fee

Another drawback of non-traded REITs is upfront fees. Charges range between 9% and
10%. Sometimes it can be as high as 15%. There can also be external manager fees. All
these factors reduce the investor return. It is always imperative to seek answers from the
management before investing in non-traded REITs.


Conclusion

No investment is without risk. With REITs investment, it is a passive income alternative to
buying a property directly. However, no investor should be influenced by the high dividend
return of the REITs. One should keep in mind that REITs can underperform in a high-interest
market.
Investors should always go for REITs that are managed by robust management, that invests
in properties types that are in demand and are publicly traded. Before investing in REITs, it is
always wise to consult your broker or financial advisor, or a trusted tax consultant.

Please follow and like us: