Risks of REITs During Recessions by Christopher Sanz, JD, LLM
Posted on January 20, 2021
Real estate investment trusts (REITs) continue to garner a lot of attention, providing average investors with an opportunity to own a small piece of income producing commercial property. However, REITs are quite different from private equity investments in commercial real estate and therefore do not provide investors with the same benefits through market downturns. Following are five reasons to consider direct investment in commercial property rather than buying shares in a REIT.
- Direct investment in commercial real estate is not subject to the volatility of public equity markets and is therefore a more stable than REITs for income and wealth-building property appreciation;
- Direct investment in commercial real estate provides unique tax benefits, including depreciation deductions and lower tax rates on capital gains, which can yield higher after-tax returns for investors
- REITs come with high management fees, compliance costs and other expenses that dilute investors’ earnings
- REITs are required to pay out 90 percent of taxable income as dividends, which may force property sales and acquisitions that do not align with stated strategies and increase risk of property appreciation loss
- Direct investment in commercial real estate offers greater flexibility in terms of operating structure, property selection and strategy to weather market downturns.
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