Why You Shouldn’t Invest In REITs And The Best Alternatives

Jeremy BiberdorfBy: Jeremy Biberdorf

February 11, 2024February 11, 2024

Real Estate Investment Trusts (REITs) offer a way to invest in real estate without owning physical properties, allowing individuals to buy shares in income-generating real estate ventures. While REITs can diversify a portfolio and provide passive income, they come with distinct drawbacks.

Investors have limited control, face potential real estate market risks, and often encounter higher tax burdens on dividends compared to other investments. These factors lead to the question of why you shouldn’t invest in REITs, as they may not align with every investor’s strategy, risk tolerance, and financial goals.

In this article, I’ll delve into the reasons why REITs might not be the best choice for your investment portfolio and offer up some quality alternatives.

What is a REIT?

Real Estate Investment Trusts (REITs) offer a gateway for individuals to invest in diverse property sectors including apartments, offices, and shopping centers, essentially opening up commercial real estate opportunities that were once exclusive to the wealthy or institutional investors.

The concept of REITs came into existence in 1960, thanks to legislation that aimed to widen the pool of investors able to benefit from real estate profits. By buying shares in a REIT, investors get a slice of the income generated from these properties without having to buy or manage the property themselves. Despite their appeal, investing in REITs comes with its own set of challenges and considerations.

Why You Shouldn’t Invest in REITs – The Drawbacks

To be clear, REITs have some advantages. REITs provide liquidity, passive income, and accessibility, making them an attractive option for investors looking to delve into the real estate market without the complexities of direct ownership.

However, they come with their own set of drawbacks that warrant careful consideration. One significant downside is the tax treatment of dividends, which are often taxed at the investor’s ordinary income rate, potentially leading to a higher tax bill compared to other investments.

Also, REITs tend to mirror the stock market’s volatility and are particularly sensitive to interest rate changes. This sensitivity to interest rates means that the value of REIT stocks may decrease as interest rates rise, posing a risk to the investor’s capital. The benefits of diversification that REITs are supposed to provide can be limited due to their correlation with the broader stock market’s performance. Investors should also be aware that REITs are influenced by micro-trends in the real estate market, which can make them riskier for short-term financial goals. REITs are generally more suited for long-term investments.

REIT Alternatives: Fractional Real Estate Investing

What if I told you that there is a way to get most of the benefits of REITs without all of the drawbacks? Well, let me introduce you to fractional Real Estate ownership through crowdfunding.

Through fractional ownership in real estate, investors can invest in individual properties as well as real estate portfolios. Here are some benefits of fractional real estate investing through crowdfunding:

  • Accessibility for Limited Budgets: Ideal for individuals seeking real estate exposure without the significant financial commitment or the responsibilities of property maintenance.
  • Diversification Opportunities:
    • Geographical Diversification: Allows investment across multiple properties or even in diverse real estate funds, minimizing the risk associated with single-property ownership.
    • Investment in Real Estate Funds: Some platforms enable investment in funds that hold a variety of real estate assets, offering a broader exposure to the market.
  • Leverage Without Personal Risk: Crowdfunding platforms often utilize debt as part of their investment strategy, but unlike traditional real estate investment, fractional investing doesn’t expose you to personal financial risks.
  • Passive Investment: Professional management of properties ensures a hands-off investment experience, avoiding the hassles of property management.

The Top Fractional Real Estate Investing Platforms

In recent years, there have been a lot more players in the Real Estate investing game, each with their own pros and cons. Here are the top platforms you should consider:

First National Realty Partners
  • First National Realty Partners: First National Realty Partners (FNRP) stands out in the commercial real estate world for its strategic focus on acquiring and revitalizing grocery-anchored shopping centers across the United States. FNRP zeroes in on opportunities to enhance the value of its properties through savvy management and targeted improvements, aiming to deliver steady cash flow and long-term growth to its investors. Through meticulous due diligence and hands-on property management, FNRP not only seeks to outperform but also to provide a gateway to premier real estate investments that promise both stability and attractive returns. Click Here to learn more about FNRP.
Fundrise logo
  • Fundrise: Fundrise is a groundbreaking platform that opens the door to real estate investment for everyday investors, allowing them to put their money into high-quality real estate ventures with just a small initial investment. This platform bridges the gap between the average investor and the lucrative world of real estate, simplifying the investment process through technology. Investors on Fundrise can access a diverse range of commercial and residential properties across the United States, pooling their resources for a slice of the real estate pie. Fundrise stands out for its user-friendly approach, commitment to transparency, and its aim for steady, long-term gains. Click Here to learn more about Fundrise.
EquityMultiple logo
  • EquityMultiple: Launched with a vision to democratize access to high-quality real estate investments, EquityMultiple connects investors with a variety of projects, including everything from ground-up developments to significant renovation efforts, across different regions in the U.S. For accredited investors looking to diversify their investment portfolio by tapping into the real estate market, EquityMultiple offers a straightforward approach to participate in bigger, often more profitable real estate ventures that were traditionally beyond the reach of individual investors. Click Here to learn more about EquityMultiple.

Final Thoughts

Investing in Real Estate Investment Trusts (REITs) allows individuals to tap into the real estate sector without the complexities of direct property ownership, offering benefits like passive income and portfolio diversification. Despite these advantages, there are significant reasons why you shouldn’t invest in REITs, including higher dividend taxes, susceptibility to market volatility, and reduced investor control over investments.

These limitations prompt a look at alternatives such as fractional real estate investing through platforms like First National Realty Partners, Fundrise, and EquityMultiple. These alternatives provide a more accessible, diversified, and manageable approach to real estate investment, sidestepping the drawbacks associated with REITs and aligning more closely with investors’ long-term financial goals.

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Jeremy Biberdorf
Jeremy Biberdorf

About the Author:

Jeremy Biberdorf is the founder of Modest Money. He's a father of 2 beautiful girls, a dog owner, a long-time online entrepreneur and an investing enthusiast.

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