Understanding the Risks and Potential Drawbacks of Investing in Real Estate Investment Trusts (REITs)

Real estate investment trusts, or REITs, offer a unique opportunity for investors to gain exposure to the real estate market without the need to own and manage properties themselves. REITs invest in a diversified portfolio of commercial properties, such as office buildings, shopping centers, and apartment complexes, and are publicly traded securities that can be easily bought and sold through a brokerage account.

However, like any investment, REITs also come with their own set of potential risks and drawbacks that investors should be aware of before diving in. Here are three key risks to consider when investing in REITs:

1. Volatility: The real estate market can be volatile, and REITs are no exception. The value of REITs can fluctuate significantly based on economic conditions and the performance of the underlying properties. This can lead to large swings in the value of REITs, which can be stressful for investors looking for more stability in their portfolios.
2. Interest rate risk: REITs tend to perform poorly when interest rates are rising. This is because higher interest rates make it more expensive for REITs to borrow money, which can hurt their profits and ultimately the value of the REITs.
3. Dividend risk: REITs are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends. However, if the REIT‘s profits decline, the dividends paid to shareholders may also decrease, which can be a disappointment for investors who rely on steady dividend income.