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Investing In REITs? Avoid These 3 Red Flags



  • REITs are some of the only stocks trading at attractive valuations right now.
  • But not all REITs are equally attractive. Investors have to learn to select the best ones.
  • In this note we cover our three biggest red flags and problems to watch out for when investing in REITs.
  • Looking for a portfolio of ideas like this one? Members of High Yield Investor get exclusive access to our model portfolio. Learn More »

The market has largely recovered from the steep sell off that we saw in March 2020. In fact, much to most people’s surprise, we saw many equities soar to new highs relatively quickly. As a result, some investors are struggling to find companies trading at discounted valuations.

REITs are one of the few investments still trading at a reasonable value. Many have still not fully recovered from the Marsh crash, making them an attractive turnaround play. Since most these REITs pay lucrative dividends, you also get paid while you are waiting.

New investors are entering the REIT market, and for the reasons stated above, it’s easy to understand why they’re excited. That said, every sector has its bad apples, and there are a few things you want to avoid when investing in REITs. Some subsectors of the REIT market are facing significant headwinds, while other REITs have excessive leverage or poor management.

Below we discuss why these red flags matter and how to spot them.

Avoiding Risky Property Sectors

The landscape of REIT offerings is wide and varied. Within the world of REITs, there are individual subsectors ranging all the way from rural farmland to data centers.

So just because two companies are REITs doesn’t mean they’ll trade similarly. This is especially the case if we compare REITs in two very different subsectors.

For example: RLJ Lodging (RLJ) is a hotel REIT, and sold off pretty heavily during the March crash. But farmland REITs Gladstone Land (LAND) and Farmland Partners (FPI) hardly dipped at all, and then retraced to close to their original value:

Today, several REITs face headwinds that are specific to their subsector. The most challenged types of REITs right now are:

  • Malls
  • Offices
  • Hotels

The pandemic has exacerbated recent trends that hurt these

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This article was written by

High Yield Investor profile picture

Samuel Smith is Vice President of Leonberg Capital, he has a diverse background that includes being lead analyst at several highly regarded dividend stock research firms. He is a Professional Engineer and Project Management Professional and holds a B.S. in Civil Engineering & Mathematics from the United States Military Academy at West Point and has a Masters in Engineering.

Samuel runs High Yield Investor investing group. Samuel teams up with Jussi Askola and Paul R. Drake where they focus on finding the right balance between safety, growth, yield, and value. High Yield Investor offers real-money core, retirement, and international portfolios. The services also features regular trade alert, educational content, and an active chat room of like minded investors. Learn more.

Analyst’s Disclosure: I am/we are long WPC. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (17)

John Windelborn profile picture
Great reminders for us all. People often get caught up in the more well known flashy numbers like yield and revenue growth and forget to look under the hood.
donFTS profile picture
12 Apr. 2021
Nice article— any thoughts on NRZ, RTW or TWO??
High Yield Investor profile picture
@donFTS Thank you for your question. We generally don't like such mREITs. They have a long history of very poor returns and their business models are too unpredictable in today's world. We favor traditional eREITs. Feel free to join us for a 2-week free trial to access all our Top Picks: seekingalpha.com/...
I ended last year with only two REITs, WPC and MPW. That covers two of the three areas you suggest. That leaves residential to add to my watch list.
High Yield Investor profile picture
@Cantfixstupid Thank you for sharing your picks.
SA-NJ52 profile picture
I looked at the top 10 picks for VNQ. It strikes me that they are the right REITs to own.

I have not been filled on my limit order because I am waiting for a better price.

Vanguard Real Estate II Index
American Tower Corp
Prologis Inc
Crown Castle International Corp
Equinix Inc
Digital Realty Trust Inc
Simon Property Group Inc
Public Storage
SBA Communications Corp
Welltower Inc

High Yield Investor profile picture
@gandc Thanks for sharing your thoughts. We think that many of those REITs are overpriced or fairly valued. The better opportunities are among smaller and lesser known REITs. Feel free to join us for a 2-week free trial to access all our Top Picks: seekingalpha.com/...

Have a great day!
jgrever621 profile picture
Quality at a fair price over time. Seems that I have heard that before. And it is the basis of Dividend Growth Investing (DGI). Buy a good stock at a decent price and wait is exactly what has been working for me for decades.

First as an investor I bought rather wildly. After time, I learned of Mr Graham. Changed everything for me.

Can't say I do all the steps each time, but in general, I follow his rules without doing all the math steps, as these would take me FOREVER.
High Yield Investor profile picture
@jgrever621 I agree with you. Don't chase for yield. Stick to quality, especially in the REIT sector. Feel free to join us for a 2-week free trial to access all our Top Picks: seekingalpha.com/...

Have a great day!
Mine: WPC, MAA and CCI
High Yield Investor profile picture
@SilverBandit Thank you for sharing your picks!
alchemist11 profile picture
Yep, you sum it up well!
Income4ever aka Cyclenut profile picture
Good insights,
I like VICI quite a bit .. solid growth, dividend and decent yield
Long WPC, O , VICI and RQI in this space
High Yield Investor profile picture
@Income4ever aka Cyclenut Thank you for your interest. I like some of the picks that you mention. We own WPC at High Yield Investor. Feel free to join us for a 2-week free trial to access all our Top Picks: seekingalpha.com/...

Have a great Sunday!
Very useful summary, thank you!
High Yield Investor profile picture
@Vanadas Thank you for your kind comment :)
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