Understanding the Risks of REITs

Posted on August 06, 2019

Not every investor has the funds to purchase one or more commercial buildings on their own, nor do they have the time to manage all the responsibilities associated with buying, selling and managing commercial real estate (CRE). Thankfully, investors have options, including pooling funds with other investors to purchase a debt or equity stake in a particular property or properties or buying shares in real estate investment trusts (REIT) that borrow money to make investments in multiple properties specific to a particular sector, such as retail, industrial, office or multi-family residential apartments.

Although (REITs) have been capturing the news headlines over the past few years, they are not without risks. Here are seven REIT risks that investors should consider.

1. REITs that are publicity traded on the equity markets are subject to not only real estate portfolio risks but also a broad range of global and domestic economic events, changes in interest rates and other evolving conditions that result in market swings.
2. Non-traded REITs are not required to registered with the SEC and are therefore not bound by the same compliance standards, disclosure requirements and investor protections of their publicly traded counterparts.
3. Portfolio diversification within a particular REIT typically is limited to a specific asset class and geographic area. Moreover, because the full portfolio of a REIT’s properties may be unspecified, investors may not have full knowledge of all of their investment risks.
4. Investors do not have a say in or control over the properties in which the REITs choose to invest or the way in which those properties are managed.
5. There are no guarantees that the securities offered by a REIT will have an established trading market, adequate trading volumes or sufficient liquidity.
6. Because REITs borrow money to fund their operations, they are subject to leverage risks and a potential lack of sufficient cash flow and access to additional financing.
7. REITs do not provide investors with opportunities to defer or eliminate capital gains tax on the sale of assets nor do they pass tax losses onto their individual investors to be used to offset taxable gains.

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 info@orionmiami.com.