Real Estate Investment Trusts (REITs) can provide average investors with an affordable option for gaining entry to the high yields and steady cash flow that can come with investments in commercial real estate. However, because equity REITs are publicly traded securities governed by the SEC, some of their potential benefits can also prove detrimental and counter to investors’ unique need and goals.
For example, the SEC requires REITs to pay 90 percent of their taxable income as dividends to investors. While these payouts translate to positive cash flow for investors, the REITs themselves must continuously buy and sell properties to fund their growth, often taking on significant debt to expand their real estate holdings. When property acquisitions and dispositions are based on these rules and constraints rather than sound investing principles, buyers/investors are more likely to overspend for a property, and sellers/investors run the risk of missing out on property appreciation. In addition, in today’s extremely low interest rate environment, REIT investors must consider how rising rates will negatively affect REIT profitability and investor returns.
Investors looking to diversify their portfolios and improve returns with commercial real estate should think twice before applying a REIT’s shotgun approach to real property investing. Instead, consideration should be given to working with experienced, private real estate investment firms with local market knowledge and deep tenant relationships who can take a much more strategic and methodical long-term approach to property purchases and sales.
With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email email@example.com.