3 Pitfalls Investors Must Know Before Investing in REITs
Apr
Contributed by Kenny Loh
Senior Consultant, Financial Alliance Pte Ltd
(The contributor can be contacted at kennyloh@fapl.sg)
To learn more about him and read his articles, visit his blog
Most investors are attracted by the high yield and passive income REITs offer. However, there are 3 important points to take note of when investing in REITs.
(1) It is never wrong to buy real estate at a discount (i.e., under value) in theory. However, beware of the value trap because some of the REITs are always traded below its book value due to inherent risks. There is no such thing as free lunch in the investing world. A cheap investment may not be a good investment as the stock market is efficient and adjusts to the true value very fast. The smart money always buys up cheap and good REITs when there is an opportunity before the retail investors even have a chance to spot them.
(2) REITs use debt and/or equity financing to raise funds to acquire properties, collect rental from the tenants and pay 90% of the net property income back to unit holders. As such, it is very common for REITs to issue additional shares (i.e., to the existing unit holders or to private investors to raise capital). Most of the time, the rights issues are offered at a discount to the market price and immediately, the existing shareholders will suffer a capital loss if they are unable to fork out additional funds to subscribe to the rights.
(3) High return is always associated with higher risk when it comes to investing. Similarly, some REITs offer very attractive distribution yield – up to 7-9% – but one must make sure they fully understand the risks in them. Most retail investors are solely relying on the distribution yield as the selection criterion when it comes to REIT selection.
Investing is all about risk management; it is very important to understand all the risks before putting your hard-earned money into REITs for your retirement. Retirees cannot afford to make mistakes when it comes to investing. Get professional help in building your REIT portfolio for your retirement and learn how to invest wisely to enjoy greater diversification and higher returns.
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