Real estate is one of the most profitable and consistent investments that you can make. For this reason, Real Estate Investment Trusts (REITs) are often considered among the best investments that a person can make – but there are some things that you should be wary of before putting your money into such a trust.
REITs have a long history of outperforming the market, and often pay back very well with minimal risk. But despite this, it’s recommended to put as much research – or even more – into REIT investments as you would put into any other investment.
REITs are allowed to be managed externally or internally, which poses the risk of conflicts of interest. When a REIT is internally managed by an employee. This is ideal, as they will be most interested in a stable portfolio with minimal risks.
Externally managed REITs are a potential for conflict of interest for many reasons. For starters, an external hire is not as reliant on the performance of the REIT for their salary. Oftentimes these individuals are paid based on the volume of assets.
The result is that an external REIT manager will be more incentivized to push for more growth and purchases just to increase their fees – this could result in a poorly managed REIT that expands beyond its own interests.
When a business borrows and is no longer able to pay interest or principle, it is said to be ‘overleveraged.’ This is not uncommon today, thanks to the many hits that the world economy has taken due to the Coronavirus pandemic. But many REITs have managed to maintain a sturdy portfolio by maintaining a well-rounded and long-term perspective that includes a full cycle.
A yearly report is good for giving confidence in the current direction, but only by looking back over the course of several years will you be able to see the full breadth of a REIT’s management and success.
The Right Sectors
REITs, in the end, are just real estate. When looking into investing in a REIT one should take the time to consider the real estate covered by the trust. While many REITs invest in retail properties like hotels or office buildings, there is any number of REITs investing in senior housing, coastal communities, or more – both of which are currently overbuilt and less likely to succeed right now.
When considering REITs you want to carefully consider how the properties themselves are positioned as well.
REITs are difficult to examine if you aren’t familiar with the business, and you’ll want to make sure you take the time to carefully consider all of your future options.