Dangers Of Investing In REITs

Q: Gerald, I want to invest in real estate without managing property.  What do you think about investing in a REIT? Kwame’, Bowie, MD

A: REITs were modeled after mutual funds. REITs buy, own and manage real estate and the main benefit is that REITs give individual investors a convenient way to invest in real estate passively. However, there 2 big dangers investing in REITs that include:

1. RECESSION VULNERABILITY

REITs are highly vulnerable to recessions because publicly traded REITs are highly correlated to the stock market. Market recessions normally lead to a drop in REIT prices. REITs are susceptible to market shocks because REITs don’t have the flexibility to retain cash. Without liquidity, it’s difficult to weather market downturns.

2. LACK OF DIVERSIFICATION

Another downside of REIT investment is the lack of diversification and competition. Most REITs specialize in a single property type, and a weakness in that particular segment of real estate obviously can substantially affect returns negatively.

Thanks for your question, Kwame’. For more real estate information and tips visit my blog at geraldlucas.com.