Things to Avoid When Investing in REITs
If you are interested in the financial market, you’d probably know that REITs or “real-estate investment trusts” that act as investments in the commercial real estate market have been very popular among investors in the past few years. One big reason for their popularity is their good payoff.
So, why should you invest in REITs? The most important answer to this question is safety – REITs are now one of the safest investments you can make because their structure is similar to that of a unit trust and you receive constant payouts at the end of each month, semester or year. Plus, REITs must distribute a minimum of 90% of the total net profit. Also, REITs are better than public listed companies because of this obligation – companies are not obligated to pay dividends if they find a good reason, such as conserving cash flow for expansion.
Investing in a REIT is also a good choice for those looking to diversify property investments with a lower risk. Having a diversified property investment portfolio can improve your profitability in the long run. And, talking of profitability, REITs are also good for investors that are looking for constant liquidity in cash flow. Wondering how? Well, the REITs shares you own can be sold almost immediately which is not the case with traditional real-estate properties you own. Plus, you can also buy other REITs shares quickly and use your money to increase your overall profit.
REITs are great as an investment, but you also need to be cautious while making an investment as there are a few things to avoid if you want to try out this type of investment or if you are already betting on REITs in 2018. Instead of making some of the most common investment mistakes, better learn from the experience of others and check out the tips below.
1. Don’t go for steady REITs
The whole idea behind REITs is to earn more money from your investment as they continue to grow and develop. When you are ready to make a REITs investment, avoid the stagnant entities that won’t increase their number of dividends because it is actually the definition of a bad investment. You want to avoid a mistake and go for prosperous companies that increase your profits.
2. Avoid REITs with a small dividend payout
A REIT that has a small dividend payout, or even a stagnant payout, is not a good investment be it for short term or long term. Putting your money down for a small profit will not do good for your investment business. Instead, go for REITs that provide an increase in their dividend payouts to make your investment worth it. In order to see which REIT is an opportunity and which one is a mistake, check out their past records – if you see an improvement on the dividend payout for investors then you are looking at an investment opportunity.
3. Shady locations are a no-go
Another important thing to consider when investing in REITs is location. The experience probably tells you that the real-estate saying “location, location, location!” couldn’t be truer when it comes to REITs as well. And, you are right! A REIT located in a shady location is a no-go, but a REIT in a strategic location is a gold mine. Why? Because a good location will also bring in more tenants and improve the sales. This way, the REIT is more profitable for you as an investor. Before you decide whether to invest or not, check the location of the property and see if it is accessible to customers. Depending on the type of REIT you are investing in, you should think of the main target – if the REIT is in retail, is it a good location for mall-goers, if it’s an apartment building, is it a good place for tenants? You could definitely avoid a mistake with a thorough research.
4. Avoid spaces with few tenants
Any REIT that has few tenants is not a good choice for an investor, especially if you are looking at retail spaces. If you want a good option, you need to search REITs that have many and varied tenants and offer diversity to customers. Plus, a space that doesn’t have many tenants may shut down if one or two large tenants decide to leave and this may cause you to lose your money.
5. Does it seem like a professional environment?
REITs that do not have a well-trained management team to handle tough situations are not a good investment. Why? Because any type of company or business will experience problems along their course and these can lead to unfortunate losses or shut-downs if not handled correctly. Knowing there is a good management team to solve problems means you are putting your money to good use.
6. Don’t go with the flow
In business, one of the biggest mistakes you can make is to follow your gut without doing a thorough research first. While business intuition is well appreciated and you should go for the opportunities you feel are going to work, a well-prepared research of the REITs market in the country you want to invest in is necessary. You need to know who are the biggest players on that market, which REITs are the strongest and bring in the most profit, what type of spaces you should invest in, how well the companies you are looking at are doing on the market, etc. Parking your money in a REIT you know almost nothing about is like opening a deposit to store your money in without reading the contract. When doing business it’s about facts before trust. Therefore, don’t go with the flow before you have done your research.
In the end, as with any other investment, REITs come with benefits and risks. You, as an investor, should know what are your long-term objectives and what is your budget and decide from there which type of investment is worth it and which one is not. REITs are safe, stable and can bring good revenue, but take the above tips into consideration before jumping on to bad investments that turn into mistakes. Let your money work for you!