Pros and Cons of REIT Investing

NEW YORK, April 13, 2021 (Newswire.com) - The real estate market is a multi-trillion-dollar one, making it one of the most prominent opportunities to help diversify away from the stock market. There are several ways to invest in real estate. Buying a home to live in is the most fundamental to our lives. Buying a property to rent it out is another option to generate passive income. Yieldstreet offers the opportunity to invest in real estate ranging from commercial properties to student housings by offering accredited investors the opportunity to invest in private real estate funds.

Another popular way to invest in real estate is to invest in real estate investment trusts or REITs. Here are a few pros and cons to investing in REITs.

PRO - it's easy 

Investors can trade REITs from their brokerage account, so it's no harder than investing in stocks in one's portfolio.

PRO - exposure to real estate without having to worry about managing a property

One of the challenges to investing in a property is the need to maintain it, whether the investor lives in it or rents it out. Meanwhile, a professional management team will likely maintain the properties that make up a REIT. That team will also have expertise in buying, selling, and renting out properties.  

CON - management teams can sometimes be misaligned

Depending on whether the REIT management team is internal or external, and on how they are paid, a management team may be incentivized in ways that are unfavorable to investors. It's important to study who manages a given REIT.

PRO - REITs pay regular dividends and are tax-advantaged

REITs are required to pay out 90% of their taxable income as a dividend to shareholders. REITs also come with several tax advantages, and the net result is quarterly or even monthly dividends for investors.

CON - investing metrics are different for REITs

Earnings per share and other typical financial metrics don't apply as much to REITs, and net income is often low or negative. Investors should instead watch for funds from operations (FFO) and pay attention to adjustments and capital expenditures.

PRO/CON - exposure to broader economy

REITs are often focused on specific sectors - retail, office buildings, or apartments. This gives investors a way to invest in a sector of the economy without directly picking winners. But, if things go poorly in that sector, those REITs may lose value.

CON - REITs are typically correlated with the stock market

Real estate is meant to give investors diversification in their portfolio. REITs tend to correlate to the broader market, though, and don't offer true diversification.

REITs offer investors a way to invest in real estate without a real estate broker license or worrying about repairs. Ease of access and regular dividends make REITs a popular investing class. Investors should keep in mind that REITs are correlated to the stock market and to the economy and that they require research to pick winners.

Source: Yieldstreet