Can I Lose Money in a REIT?

by Jerry Shaw
Investing in a REIT instead of property offers both security and risk.

Real estate investment trusts, known as REITs, allow you to buy shares of real estate income without having to purchase the property yourself. REITs may include assets in commercial buildings, apartments, resorts, facilities and even mortgages or loans. When you put your money in these trusts, you face the same risks as other investments. So you can lose money and need to do research or consult with a financial professional when considering a REIT.

Income from Real Estate

Unlike real estate companies that buy and resell properties, REITs operate property as part of an investment portfolio, distributing dividends from income to shareholders. REITs must follow regulations according to the Securities and Exchange Commission. At least 75 percent of their holdings must be in real estate assets and cash from sources such as rent and interest on financing of real property, along with stock and security investments.

Types of Investments

Investing in REITs requires the same attention as putting your money in stocks or mutual funds. You can purchase shares of trusts or REIT mutual funds through a broker and review performances of the investment through quarterly and annual reports. Types of investments include equity REITs, which receive income from real estate property, or mortgage REITs, which earn money from mortgages, loans or securities backed by mortgages. Some REITs, called hybrid REITs, combine equity and mortgage strategies.

Equity REITs

REITs perform according to certain economic trends. The trusts are often invested in commercial projects, office buildings or shopping centers, and increase in value during booms in development of those properties. Homebuilding ups and downs may not affect the investments. However, investing in REITs usually involves long-term strategies, similar to investing in mutual funds with investments spread throughout a variety of property types. You can weather difficult and prosperous times in commercial sectors with equity REITs that beat inflation rates over time and generate increasing dividends over the years. Investing may require reviewing and readjusting your REITs. Diversifying your portfolio with several REITs that include different types of property or geographical areas help secure your investments.

Risky Ventures

Mortgage REITs are subject to volatility, which can generate high returns when residential or commercial mortgages become favorable with low interest rates. However, you face risks when interest rates begin to rise or during troubled economic times when foreclosures increase. Mortgage REITs have invested in lenders that take less risk in loans and offer adequate disclosures after a housing market slump. You can invest in non-traded REITs, which are not listed on the stock exchange, but may promise high payouts. Non-traded REITs are not registered with the SEC and may not have accurate descriptions of their real value. High yields from the investments attract investors, but risks of a sudden drop in value could lead to losses.

About the Author

Jerry Shaw writes for Spice Marketing and LinkBlaze Marketing. His articles have appeared in Gannett and American Media Inc. publications. He is the author of "The Complete Guide to Trust and Estate Management" from Atlantic Publishing.

Photo Credits

  • Creatas/Creatas/Getty Images