What are the Disadvantages of Investing in Real Estate Investment Trusts
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No investment is perfect, or we wouldn't need or have any variety to choose from -- all come with risks and disadvantages as well as benefits, and REITs are no exception.
Fortunately for us as income investors, the biggest disadvantage to investing in Real Estate Investment Trusts is simply that their share prices normally don't grow at lightning speed. There have been a few times in the past when Wall Street treated real estate as a "glamor" industry, but that's not usually true.
Therefore, if you're looking for a "ten-bagger" so you can pay the IRS a lot of capital gains taxes, REITs aren't for you.
You Need to Buy More Than One or Two REITs
A big disadvantage to buying any single Real Estate Investment Trust, however, is that they are specialized. They all concentrate on particular kinds of real estate. Most of them concentrate on particular geographic areas.
Therefore, I would never tell anybody to simply buy one REIT and they could be done with it. According to Ralph L. Block, a minimum of six REITs is necessary to gain the benefits of diversification, and I would prefer even more than that.
Therefore, although REITs as an investment category do give you the great benefits of investing in real estate without the problems of direct ownership of it, they do so in the aggregate. As individual companies, they're only a little more diversified than owning just one building or commercial real estate property.
In the past, REIT investors didn't get much respect from Wall Street, and brokers didn't have REIT analysts on staff. This has changed a lot, and a lot of information is available.
REITs on the Whole are Subject to Interest Rate Sensitivity
This is not as much a problem as with bonds, but when interest rates go up, this does make bonds relatively more attractive, and does make the real estate business more difficult, cutting into REIT profits.
Currently, REIT prices are low because of the subprime mortgage problem. However, this is a disadvantage only if you want to sell REIT shares right now, which you shouldn't do. This is a good thing for people who want to start now to invest in REITs. Yields are high.
Next: What are the risks of REITs -- all investing contains some risk. Which ones apply to real estate investment trusts.
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