As you near retirement, someone might have approached you with the idea of investing in a real estate investment trust, or a REIT. These are typically marketed by enticing promises such as 6-7% returns, quarterly dividends, and long-term leases. You will be told that these are incredibly safe investments, because they are attached to stable properties like fast food restaurant franchises. The salesman can make them sound great, but there are some major underlying issues he won’t mention.
What’s a REIT?
REIT’s are simply companies that invest in income-producing real-estate, such as apartment complexes or shopping malls. Owning one let’s you get in on a share of the profits made by these properties, without having to put a massive amount of money down. Because of this, and the lofty promises made with their sales pitch, they can seem very attractive. Problem is, there are some nasty hidden issues that come with them.
Why not a REIT?
1. High Commisions: They are usually high-commission products where the seller can make 8-10 percent just to get you in. That’s a big chunk of change that significantly lowers the overall investment; not to mention that it gives the salesman an incentive to sell it to you, even if it’s not in your best interest
2. Fluctuating rate return: If the underlying properties of the REIT go out of business, the REIT makes no income, and you don’t get paid. The rate can drop to zero, or they can suspend the payments, and there’s nothing you can do about it. And this is common, especially since the retail industry is declining, and most REIT’s are heavily invested in retail.
3. You can’t get out: they tend to very illiquid – you can get in any time you like, but getting out may be a different story. You might say, “Well that’s not what I signed up for”, and then try to redeem the shares; but you’ll find that the company won’t redeem them. You’re stuck. This is because these products are often not trade-able on an open market. Usually the only way you can sell it is to try and find a third-party speculator that might be buying; typically for pennies on the dollar.
Am I the only one saying this? No, there are a lot of experts out there saying the same exact thing. Robert Schiller, who won the Nobel prize in economics, has an article all about the negatives of REIT’s entitled, “Why Land and Homes Actually Tend to be Disappointing Investments”. Investopedia, NASDAQ, and the NY times, to name a few, all have articles on the downsides of REIT’s as well.
Never make a hasty investment, do your research, or give us a call first. There is a large body of academic data and research on better ways to take income in retirement.
