REIT Are Safe, But...! (2024)

FAQs

REIT Are Safe, But...!? ›

As with any investment, there is always a risk of loss. Publicly traded REITs have the particular risk of losing value as interest rates rise, which typically sends investment capital into bonds.

REITs can be sensitive to interest rates and may not be as tax-friendly as other investments. When a REIT is concentrated in a particular sector like hotels, and that sector is negatively impacted, investors can see amplified losses.

Because of their lower volatility, REIT returns are less correlated with the stock market. That makes REITs an excellent way for investors to build a diversified portfolio and improve their risk and return profile.

Lesson #1: The Dividend Should Be An Afterthought

I still remember buying my first REIT which offered a 10%+ dividend yield, thinking that I could earn significant passive income and high total returns. But here you need to know that the highest-yielding REITs are often the least rewarding over the long run.

Here's an explanation for how we make money . More than a year of interest rate hikes by the Federal Reserve pushed down returns on real estate investment trusts, or REITs. While higher rates negatively impacted nearly every sector of the economy in 2022 and most of 2023, real estate was hit especially hard.

However, REITs are not risk-free: they may have highly inconsistent, variable returns; are sensitive to interest rate changes are liable to income taxes may not be liquid, and can be dramatically affected by fees.

Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.

“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% of its taxable income to shareholders annually in the form of dividends.” Are you interested in exploring REITs that pay monthly dividends?

Can You Lose Money on a REIT? As with any investment, there is always a risk of loss. Publicly traded REITs have the particular risk of losing value as interest rates rise, which typically sends investment capital into bonds.

Due in part to their attractive current yields, REITs have tended to deliver annualized total returns to investors of 10 to 12 percent over time.

Will REITs recover in 2024? ›

With healthy property fundamentals and a favorable interest rate environment, REIT fund managers expect the sector to deliver double digit returns this year.

Though 2022 and 2023 were challenging years for REITs, the recovery is likely on the horizon. Edward F. Pierzak is senior vice president of research at Nareit where his primary responsibility is contributing to Nareit's commercial real estate and macroeconomic analysis.

If the REIT fails this ownership test for more than 30 days (31 days if the year has 366 days) in a taxable year of 12 months, it can lose REIT status and cannot elect to be treated as a REIT for five years (IRCазза856(a)-(b)). The test is pro-rated for taxable years shorter than 12 months.

REITs closely follow the overall real estate market and are subject to much of the same risks, including fluctuations in property value, leasing occupancy, and geographic demand. Real estate is typically very sensitive to changes in interest rates, which can affect property values and occupancy demand.

“REITs often structure buildings as separate financial entities. If they default on debt, creditors generally can foreclose on the building but have no recourse against the rest of the company … in this way, the loss incurred by the REIT is contained,” says Sharma.

Bad REIT earnings tend to run afoul of Section 856, which provides that at least 95% of a REIT's gross income must be derived from “rents from real property.” It also provides that at least 75% of its gross income must be derived from that source.

Mortgage REITs were affected by the sharp rise in interest rates during 2022 and 2023, and again have been under pressure on the “higher for longer” news. Even as its floating rate portfolio hasn't been directly squeezed by rising rates, BXMT stock is not out of the woods.