What Risks Are Involved With REITs?

Investing in Real Estate Investment Trusts (REITs) involves risks such as market fluctuations and rising interest rates, which can reduce value, especially with non-traded REITs that are harder to sell. Additionally, poor management decisions can negatively impact your investment.

A financial advisor can make sure the REIT fits your investment goals and comfort level. If you believe your advisor engaged in misconduct, consult a REIT scam lawyer.

Market Risks

Just like any other stock, the value of publicly traded REITs can go up or down depending on economic factors, investor sentiment, and market conditions. This means that even if the underlying real estate properties are performing well, the REIT’s share price can still fluctuate due to broader market trends.

If the market is facing a downturn or the economy is uncertain, the value of your REIT investment may decrease. 

Fees

REITs often charge management fees for overseeing the properties and operations, which can reduce your overall profit. Some REITs also have sales commissions, administrative fees, or acquisition fees for buying new properties.

These fees can add up over time, especially with non-traded REITs, which may have higher costs and less transparency. Before investing, make sure you understand all the fees involved and how they might affect your potential returns.

Interest Rate Risk

Interest rates can impact your investment. When interest rates rise, the cost of borrowing money increases. REITs that rely on borrowed funds to finance their property purchases or operations may see their costs go up, which can reduce their profitability.

Higher interest rates can also make other investments, like bonds, more attractive to investors, causing the value of REITs to drop. Additionally, rising rates can affect the real estate market, as higher borrowing costs can reduce demand for properties and lower property values.

Concentration Risk

Concentration risk in REITs refers to the potential risk of having too much of your investment tied to a single asset or type of property. If a REIT heavily invests in one type of real estate (such as office buildings or shopping malls) or a specific geographic area, it may be vulnerable to downturns in that particular market.

For example, if the demand for office spaces decreases or a region faces an economic downturn, the REIT’s value could decline significantly. Diversification is key to managing overconcentration, as it spreads your investment across various property types and locations, reducing the impact of a decline in any single sector or area.

Management Risk

As a new investor, you should be aware of management risk in REITs. Management risk refers to the possibility that the people running the REIT may make poor decisions that could hurt your investment.

For example, they might choose bad properties to invest in, mismanage the REIT’s funds, or fail to make strategic decisions that could lead to lower returns. Research the management team’s experience and track record before investing in a REIT. A good management team can make a big difference in the success of the investment.

Liquidity Risk

Liquidity risk in REITs refers to the difficulty of selling your investment quickly without affecting its price. Publicly traded REITs are generally more liquid because they can be bought and sold on the stock market at any time.

Non-traded REITs, however, are much harder to sell, as there may be no active market for their shares. If you need to access your money, you might not be able to sell your investment right away, or you might have to sell at a lower price than expected. This makes non-traded REITs riskier for investors who may need quick access to their funds.

Inflation Risk

Inflation can erode the purchasing power of money, affecting both the cost of property maintenance and the value of rental income. While some REITs, particularly those in sectors like real estate and infrastructure, may be able to adjust rents in response to inflation, others may not keep pace with rising costs. This can reduce profitability and negatively impact returns.

Additionally, higher inflation often leads to higher interest rates, which can hurt REITs by increasing borrowing costs and lowering property values.

Scams

REITs often involve complex financial structures and a lack of transparency, which can make it difficult for investors to fully understand where their money is going.

Some REITs, especially non-traded or private ones, may not be subject to the same level of oversight or regulation as publicly traded ones, creating opportunities for fraud.

Advisors can take advantage of this by making false claims about returns, inflating property values, or hiding fees. The promise of high returns with little risk can be enticing, especially to new investors, but it can also be a tactic used to lure people into fraudulent schemes. Without proper due diligence and caution, investors can fall victim to these scams.

Call a REITs Scam Lawyer Today

REITs offer an attractive opportunity for investors seeking exposure to real estate without the complexities of direct property ownership. They provide the potential for regular income through dividends and offer diversification by spreading investment across various properties. However, the draw of REITs must be weighed against several significant risks.

If you believe you suffered losses in your investment portfolio due to your financial advisor’s negligence or wrongful actions, get legal help now.

At Meyer Wilson, we fully devoted our practice to investment misconduct, and over the years, we have helped thousands of investors recover their losses. Call today for a free consultation.