Every investment strategy comes with pros and cons, including real estate investment trusts (REITs). While we have learned a handful of benefits from REIT investment, it is as much important to know the disadvantages of REITs. Learn some of them below!
Some cons to consider in real estate investment trusts (REITs)
As a unitholder, you have no control in the REIT management. Hence, you may want to pay more attention to its growth prospect, property types and geographical locations before actually investing in one. Predicting which real estate can earn you bucks is one of REIT investment challenges. In some cases, you might even fall on a flopping investment and end up with zero return.
Though the stock market might less likely affect REITs, it is still not an impossible case. Some publicly-traded REITs may still go up and down along with stocks. Quoted from Investor Junkie, private non-traded REITs, on the other hand, could be complex, illiquid, less transparent and carry high fees.
It is also important to note that trading in and out of REITs will cost you money. According to Investor Junkie, the fees for REIT are often paid upfront, and it usually takes over roughly 20-30% of the REIT’s value. The fees may eat up your potential returns. Moreover, since REIT prices are set in the public market, some of them can trade at a premium price. Hence, you may overvalue the underlying assets you invest in.
Try not to let the return REITs offer blinds your eyes. Despite the guaranteed return from 90% of the income, REITs also come with a high tax. Investor Junkie noted that the tax for REITs are based on your ordinary-income rate. Hence, investing in REITs through tax-deferred accounts can really help you minimize taxes.
Furthermore, the 90% rule may become a hindrance to REIT’s growth. With 90% of the income distributed to the unitholders, companies have very limited capital to invest in the property. Thus, companies may not be able to renovate or purchase more properties.
Read also: Real Estate Investment: Rental Property Investing
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