Like any investment, REITs have pluses and minuses. Certainly, they carry more volatility than government securities and money market funds.
Some investors and financial advisors steer clear of REITs altogether, believing that their potential downside is too great. They point out that the basic problem with REITs is real estate—property that cannot be moved to other locations or easily altered when a problem arises in a particular sector. For instance, if you acquire shares in a REIT that invests heavily in residential developments that don't attract buyers or renters, the REIT's managers will have a hard time meeting their profit expectations or selling the property. And REITs that invest in mortgage loans can post poor performances following drops in interest rates.
Other investors and financial advisors are REIT advocates, strongly believing in the ability of REITs to add considerable income potential to a portfolio with a reasonable level of risk. They point out that many REITs have performed well over time and that conservative investors can lessen their risk by investing in REITs that have diversified investments or in mutual funds that invest in multiple REITs. These advocates also remind us of the tax advantage of being able to deduct up to $3,000 of regular earnings on your income tax return if you incur a loss through your REIT.
All in all, REITs can provide a high yield and a hedge against inflation for investors comfortable with a certain amount of risk. Remember, the risk—and potential rewards—tend to be higher for REITs that invest in mortgage loans than for those investing in equity.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.