What Are The Pros and Cons of REITs? (2024)

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Home > Investment Strategy > What Are The Pros and Cons of REITs?

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Investors new to the real estate investment space are often found looking for the most common pros and cons of REITs, or real estate investment trusts. While investing in REITs can be a great way to diversify your real estate investment portfolio, they may not be ideal for all investors in all situations. Let’s take a close look at the various upsides and downsides to these someone nebulous real estate funds.

What Is An REIT?

A REIT is a real estate investment trust, and it consists of a company that invests in income-producing real estate. They handle all of the necessary property investment and management of these properties, taking most of the research, work, and ongoing hassle of managing real estate investments. Individual investors are then able to buy shares of the REIT, and that per-share ownership entitles those investors to shares of the revenue and profits the REIT produces. This allows investors to more easily add the properties the REIT owns to their portfolios.

What Are The Pros And Cons Of REITs?

Pros

  • Investors with minimal capital can more easily invest in real estate by buying shares of a REIT, instead of purchasing an entire property or building. This makes them very attractive options for new investors, or those trying to get more exposure to real estate investing in general.
  • REITs are also, generally, publicly-traded. Anything publicly traded is much more accessible to the beginner, and allows a softer and more affordable entry point into the real estate market.
  • Investors with limited capital can still experience capital appreciation and receive dividends. This lets more investors become familiar with the asset class than would otherwise be able to.
  • REITs can often focus on a particular type of real estate, so investors can frequently choose to invest specifically in REITs that manage apartment complexes, commercial properties, or even raw land.

Cons

  • They tend to be more inefficient for the advanced investor, and often don’t have the potential for returns that can be seen by investing in a single property or multiple properties by an investor.
  • The return from a REIT is often reduced by the operating costs and expenses of the company that runs the trust. This increased cost and expense level directly translates to lower profit potential.
  • REITs with higher returns are also more expensive to invest in, which can price some investors out entirely.

Instead Of Dealing With The Pros And Cons Of REITs

An alternative to dealing with the potential risks of REITs is to work with a wealth planning or investment advisor that can help you determine real estate investments that are more closely aligned with your goals and personal risk tolerance. You may find that while REITs are fully managed, you also have little influence on properties that are added to the REIT, which takes much of your investment autonomy away. In cases like this, you may be better suited to investing in individual properties or units, either on market or off-market, where you can ultimately manage the investment and the potential income it will create, returning autonomy to you and your real estate portfolio.

Talk To A Pro Before Jumping In & Investing In REITs

Real estate investing can be complex and full of specific risks inherent to owning property, but unless the situation is just right, it may not be conducive to your investment strategy. Before taking the leap and buying into a REIT, reach out and talk with an advisor who can discuss the pros and cons of REITs in more detail, and help you decide if they are right for your wealth management strategy.

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Investment Advisory services are offered through Prevail Innovative Wealth Advisors, LLC, (PIWA) a federally registered investment advisor. Registration with any securities authority does not imply a certain level of skill or training. Fixed insurance products and services are offered through Prevail Strategies, LLC, a licensed insurance agency. Prevail Innovative Real Estate Opportunities, LLC a propriety real estate division. Prevail Innovative Wealth Advisors, LLC and Prevail Strategies, LLC, and Prevail Real Estate Opportunities, LLC. have common ownership. Prevail Innovative Wealth Advisors, Prevail Strategies and Prevail Innovative Real Estate Opportunities do not provide tax or legal advice. You should always consult your CPA or tax professional for decisions involving tax implications present and future.

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What Are The Pros and Cons of REITs? (2024)

FAQs

What are pros and cons of REITs? ›

The benefits of a REIT investment include liquidity, diversification, and passive income in the form of high dividends. The potential downsides of a REIT investment include taxes, fees, and market volatility due to interest rate movements or trends in the real estate market.

Find Out More ›
What are the pros of REIT? ›

REITs typically pay higher dividends than common equities. REITs are able to generate higher yields due in part to the favorable tax structure. These trusts own cash-generating real estate properties. REITs are typically listed on a national exchange and provide investors considerable liquidity.

Read More ›
What is the downside risk for REITs? ›

Summary of Why Investors May Not Want to Invest in REITs

But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.

See More ›
What are the problems with REIT? ›

Non-traded REITs or non-exchange traded REITs do not trade on a stock exchange, which opens up investors to special risks.
  • Share value. Non-traded REITs are not publicly traded, which means investors are unable to perform research on their investment. ...
  • Lack of liquidity. ...
  • Distributions. ...
  • Tax treatment.

View More ›
Are REITs a good investment? ›

There are advantages to investing in REITs, especially those that are publicly traded: Steady dividends: Because REITs are required to pay 90% of their annual income as shareholder dividends, they consistently offer some of the highest dividend yields in the stock market.

Show Me More ›
Are REITs a good idea now? ›

Investment manager Hazelview Investments sees upside for REITs this year. Not only because their balance sheets are strong, but also because their valuations are low. Investor sentiment drove the 2022 decline for REITs, more so than business results. That positions high quality REITs for a comeback this year.

Continue Reading ›
Why REIT is better than owning property? ›

Buying and selling REIT shares is easier than it is with a physical property. They obviate the need for market-specific knowledge and property management while making it easier to diversify your real estate portfolio. Instead of owning one concentrated position, you own a fraction of tens, hundreds, or thousands.

Find Out More ›
What are the advantages of investing in a REIT over direct property? ›

Perhaps the biggest advantage of REITs is that individual investors can access profits from real estate without the need to own, operate, or directly finance properties. They offer a low-cost way to invest in the real estate market.

Show Me More ›
Why REITs are better than rental property? ›

Liquidity. If you ever need to liquidate your investments, REITs may prove to be a bit easier than rental property. In order to liquidate a rental property, you will generally need to sell it. This can take time, energy and money, between preparing and listing the house, showing the property and then closing on a sale.

Get More Info ›
Can you lose money on REITs? ›

Any increase in the short-term interest rate eats into the profit—so if it doubled in our example above, there'd be no profit left. And if it goes up even higher, the REIT loses money. All of that makes mortgage REITs extremely volatile, and their dividends are also extremely unpredictable.

Tell Me More ›

Are REITs riskier than stocks? ›

In general, no. Although investing in REITs does carry risk, data suggests that REITs are less risky than stocks both in the short term and in the long term. As always, past performance does not guarantee future performance, but the data we have on hand is still quite promising for would-be REIT investors.

Learn More Now ›
Do high interest rates hurt REITs? ›

The Bottom Line. After looking at correlation patterns and historical data, it appears that returns from REITs vary during different interest rate periods, but for the most part have shown a positive correlation during increasing interest rates.

Learn More Now ›
What causes REIT to fall? ›

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.

Get More Info ›
What happens when a REIT fails? ›

Any disqualification other than due to the gross income tests and asset tests § 856(g)(5) • Failure is due to reasonable cause and not to willful neglect. REIT must pay $50,000 for each failure.

Find Out More ›
Why is REIT losing money? ›

The Singapore real estate investment trusts (S-REITs) have always been a reliable source of dividend income over the years. However, Singapore REITs have been underperforming due to a combination of high inflation and surging interest rates.

Find Out More ›
Are REITs as risky as stocks? ›

Most REITs are less volatile than the S&P 500, with some only half as volatile as the market at large. The self-storage REIT subgroup shows the highest returns, with annualized returns of 18.8% from 1994 to 2021.

Know More ›
Can a REIT lose money? ›

Any increase in the short-term interest rate eats into the profit—so if it doubled in our example above, there'd be no profit left. And if it goes up even higher, the REIT loses money. All of that makes mortgage REITs extremely volatile, and their dividends are also extremely unpredictable.

Discover More ›
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