Are REITs as risky as stocks? (2024)

Are REITs as risky as stocks?

Compared to other investments such as stocks and bonds, REITs are subject to various risk factors that affect the investor's returns. Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.

Are REITs more risky than stocks?

In general, no. Although investing in REITs does carry risk, data suggests that REITs are less risky than stocks both in the short term and in the long term. As always, past performance does not guarantee future performance, but the data we have on hand is still quite promising for would-be REIT investors.

Can a REIT lose money?

Any increase in the short-term interest rate eats into the profit—so if it doubled in our example above, there'd be no profit left. And if it goes up even higher, the REIT loses money. All of that makes mortgage REITs extremely volatile, and their dividends are also extremely unpredictable.

What are the downsides to REITs?

While there are many benefits of REITs, it is important to know that there can be potential risk involved if not done with a proper strategy. Market fluctuations, interest rate change, and the potential for declines in property values can impact the performance of REITs.

Why are REITs not doing well?

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.

Why don't people invest in REITs?

Summary of Why Investors May Not Want to Invest in REITs

But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.

Are REITs safe during a recession?

Typically, the upfront costs of investing in a REIT are low, while their risk-adjusted returns tend to be high. Because the healthcare industry is historically defensive during times of economic crisis, investing in a healthcare REIT can offer growth potential during a recession.

Can a REIT go to zero?

While it is true that the underlying assets of a Real Estate Investment Trust (REIT) typically cannot go to zero, it is still possible for a REIT to go bankrupt. This can occur if the REIT takes on too much debt, mismanages its properties, or faces significant legal or regulatory issues.

What I wish I knew before investing in REITs?

This is the biggest and most important mistake that REIT investors keep on making. They see REITs as "income vehicles" and therefore, they will select their investments based on their dividend yield. In their mind, the higher the better. But in reality, the dividend is just a capital allocation decision.

What is the 90% REIT rule?

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 percent of its taxable income to shareholders annually in the form of dividends.

Are REITs a good investment in 2023?

However, our review of REIT balance sheets and debt suggests that REITs are well-positioned for economic uncertainty in 2023 because of their strong balance sheets. They are entering the new year with leverage near historical lows, and well-termed, mostly fixed-rate debt and very low current interest expense.

How do you lose money in REITs?

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.

Are REITs riskier than bonds?

While both REITs and bonds have enjoyed lower volatility compared to stocks, bonds are the lower volatility asset class due to their much lower correlation with stocks. Meanwhile, REITs can experience significant share price volatility, especially over short periods of time.

Will REITs do well in 2024?

After a lackluster performance for the majority of 2023, the Fed's latest decision to keep interest rates steady and an indication of three rate cuts in 2024 are likely to make real estate investment trusts (REITs) an attractive investment option for many.

How are REITs performing in 2023?

The jump came after a poor performance in the prior quarter when the Dow Jones Equity All REIT Index recorded a negative 8.4% return. The strong fourth quarter carried over to an 11.3% return for 2023 as a whole for the REIT-focused index, underperforming the S&P 500's 26.3% return for the year.

What happens to REITs when interest rates rise?

Therefore, if rates begin to rise then REIT cash flows will decline at a time when discount rates are rising. They fear the end result will be capital losses that offset the higher distribution yield and result in negative total returns.

What is better than REITs?

REITs allow individual investors to make money on real estate without having to own or manage physical properties. Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making.

Is it better to invest in REITs or stocks?

If you are interested in a real estate investment that is reliable, hands-off and offers dividends, REITs could be the answer. If you're looking for a higher-risk – but high-potential – investment or want to be able to invest in specific companies you admire, buying individual stocks could be the answer.

Is a REIT better than owning property?

Direct real estate investments may be more expensive upfront but give investors increased control and flexibility. Both real estate and REITs can help investors hedge inflation and market downturn risks. Both can also be a source of regular cash flow, though REITs are a much more passive investment than real estate.

Do REITs do well in high inflation?

Historically, REITs are one of the better-performing sectors during inflationary periods. We can see this in the following image. You'll notice REITs are in the upper right area, showing they are outperformers during periods of high inflation.

Do REITs do well during inflation?

REITs provide natural protection against inflation. Real estate rents and values tend to increase when prices do. This supports REIT dividend growth and provides a reliable stream of income even during inflationary periods.

Do REITs outperform the S&P 500?

Data source: Nareit and YCharts (2022). As you can see, REITs have outperformed the S&P 500 over the past 20-, 25-, and 50-year periods. REITs also outperformed stocks in the most recent full year of available data (2021).

Can I sell my REIT anytime?

Investors can buy and sell shares of public REITs at any time during trading hours. With private REITs, on the other hand, investors may have to wait for a redemption event, which can occur quarterly or annually, before they can cash out their investment. Additionally, private REITs may charge redemption fees.

Can you live off REIT dividends?

Reinvesting REIT dividends can help retirement savers grow their portfolio's investment, and historically steady REIT dividend income can help retirees meet their living expenses.

Can you lose principal in a REIT?

Like all common stocks, returns and principal invested in REITs are not guaranteed. REITs typically provide high dividends plus the potential for moderate, long-term capital appreciation. A REIT must distribute at least 90% of its taxable income to shareholders annually.

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