The Untold Truth About REIT Investments

Feb. 04, 2019 9:00 AM ETGNL, OPI, SIR, VNQ, SPY113 Comments

Summary

  • It is well-known that REITs are our favorite asset class for high-yielding total return investments.
  • Nonetheless it is not all sunshine and rainbows. In this article, we highlight the dark side of the REIT market.
  • With a strict selection of the best REITs, most of these downfalls can be avoided and investment performance can be materially improved.
  • Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our model portfolio. Start your free trial today »

In a recent article entitled “The Untold Truth About Rental Investments”, I go on to explain that the reality of rental investments is very different from their common perception. Rentals are commonly presented as low risk/high return investments with great passive income. In reality:

  • They are very work intensive with managerial difficulties in managing the 3 Ts: tenants, toilet and trash.
  • They are financed with extreme leverage - exposing investors to excessive risks.
  • Finally, they are illiquid, concentrated investments with high transaction costs.

Moreover, rental investors tend to believe that they are able to earn much higher returns. Again, in reality, REITs have historically outperformed private real estate investments by up to ~4% per year for the past +25 years:

source

By exposing these flaws of rental investments, I came to the conclusion that the great majority of investors should favor REIT investments over rental properties. REITs combine the positive attributes of stocks (liquidity and low transaction cost) with the benefits of real estate (higher income and total returns). They are completely passive investments, provide better diversification, and are managed by professionals.

Nonetheless there is another side to every story. REITs have their flaws as well; and while they are (by far) our favorite option for real estate investments, there is an untold truth to be told here as well. Upon the request of a follower, we go on to expose the often-forgotten dark side of REIT investments:

#1 REIT Management Teams: Dishonesty, Misalignment, and Overpay

The REIT industry has come a long way. Back in the 70s, it was very common for management teams to take advantage of shareholders by charging excessive fees and doing what was right for them. Over the years as the market kept on growing, REITs have become much friendlier to shareholders and today, most management teams are well-aligned

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This article was written by

Jussi Askola profile picture
57.14K Followers
Become a “Passive Landlord” with our 8% Yielding Real Estate Portfolio.

Jussi Askola is a former private equity real estate investor with experience working for a +$250 million investment firm in Dallas, Texas; and performing property acquisition in Germany. Today, he is the author of "High Yield Landlord” - the #1 ranked real estate service on Seeking Alpha. Join us for a 2-week free trial and get access to all my highest conviction investment ideas. Click here to learn more! 

Jussi is also the President of Leonberg Capital - a value-oriented investment boutique specializing in mispriced real estate securities often trading at high discounts to NAV and excessive yields. In addition to having passed all CFA exams, Jussi holds a BSc in Real Estate Finance from University Nürtingen-Geislingen (Germany) and a BSc in Property Management from University of South Wales (UK). He has authored award-winning academic papers on REIT investing, been featured on numerous financial media outlets, has over 50,000 followers on SeekingAlpha, and built relationships with many top REIT executives.


DISCLAIMER: Jussi Askola is not a Registered Investment Advisor or Financial Planner. The information in his articles and his comments on SeekingAlpha.com or elsewhere is provided for information purposes only. Do your own research or seek the advice of a qualified professional. You are responsible for your own investment decisions. High Yield Landlord is managed by Leonberg Capital.

Disclosure: I am/we are long ALL STOCKS IN CORE PORTFOLIO AT HIGH YIELD LANDLORD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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