Real Estate Investment Trusts (REITs) provide one way in which long-term investors are able to build an income-producing portfolio which tends to be rather stable over time as compared to other similar income-producing asset classes.
REITs essentially take many of the headaches out of owning income-producing property, providing investors with access to a real-estate portfolio and the income associated with real property, without having to deal with any of the repairs and maintenance work, tenant management, or rent collection.
The diversification REITs provide, along with the ease of mind of owning shares of a property portfolio instead of owning the physical property itself, can often make the associated yield with a REIT seem less risky than it is.
Many REITs offer dividend yields in the 5%-10% range, with yields often much higher than some corporate non-investment grade bonds. The yields REITs offer are secured by the underlying real estate, and are supported by rather high levels of debt compared to other equity securities.
Due to the nature of real estate, REITs are able to lever up much more easily than most companies would otherwise be able to, making leverage and the debt-to-equity ratio an important consideration for REIT investors trying to assess the underlying risk level with a given REIT.
Another consideration REIT investors should keep in mind is interest-rate risk. As a bond proxy, REITs are often much more sensitive to increases in interest rates than other securities. As the U.S. Federal Reserve continues its hiking schedule, REITs may be adversely impacted as other income-producing securities become more attractive on a relative basis to REITs over time.
