Real estate investment trusts, or REITs, are a type of investment that allows you to pool your money with other investors to purchase property or mortgages. While REITs offer the potential for high returns, they also come with a number of risks that you should be aware of before investing. In this blog post, we will explore some of the risks associated with REITs so that you can make an informed decision about whether or not they are right for you.
Share Value
Non-traded REITs are not publicly traded, which means investors are unable to perform research on their investments. This can be risky for investors who may have their capital tied up for extended periods or who may have no other way to exit the investment if they change their mind about its value.
Lack of Liquidity
REITs are a popular investment, but they have some associated risks. One of the biggest risks is a lack of liquidity. When you invest in a REIT, you essentially invest in a company that owns and operates real estate. Your investment is not as liquid as it would be if you invested in stocks or bonds. If you need to sell your shares quickly, you may not be able to get top dollar for them.
Another risk to consider is that REITs are subject to the same economic forces as other real estate investments. If there is a downturn in the real estate market, the value of your investment will go down along with everything else.
Finally, REITs can be volatile. Their share prices can go up and down a lot in short periods. This can make them a risky investment for people looking for stability in their portfolio.
Distributions
Three main types of risk are associated with investing in REITs: interest rate, market risk, and credit risk.
Interest rate risk is the possibility that changes in interest rates will cause the value of your investment to fluctuate. For example, if you invest in a REIT with a lot of debt, an increase in interest rates could lead to higher borrowing costs and lower profits.
Market risk is the possibility that changes in the overall market will cause the value of your investment to go up or down. For example, if there is a recession and the demand for commercial real estate decreases, the value of your REIT investment could decrease.
Credit risk is the possibility that the company that owns the property you have invested in will default on their loan payments. This could lead to the loss of your investment.
Fees
When it comes to real estate investment trusts (REITs), you should be aware of a few different types of fees. First, there is the management fee, which is typically around 1-2% of the total value of the REIT. This fee goes towards paying the expenses of running the REIT, such as staff salaries, marketing, and other operational costs.
Then there are acquisition and disposition fees, which are charged when the REIT buys or sells properties. These fees can range from 0.5-2% of the total transaction value and can add up quickly if the REIT is actively buying and selling properties.
Finally, financing fees are also charged when the REIT takes out loans to finance its operations or acquisitions. These fees can vary depending on the type and terms of the loan but can add up to a significant amount over time.