REITs: My Rollercoaster Ride (And What I Learned)
What Exactly Are REITs, Anyway? (Or, My Initial Confusion)
Okay, so, REITs. Real Estate Investment Trusts. Honestly, for the longest time, it just sounded…complicated. Like something only finance bros in tailored suits understood. I mean, real estate? Investments? Trusts? It was a triple whammy of words that usually sent me running in the opposite direction. But, I kept hearing about them, how they could generate passive income, and well, the allure of passive income is strong, right? So I decided to actually, you know, *learn* what they were.
Basically, a REIT is a company that owns or finances income-producing real estate. Think of huge apartment complexes, shopping malls, office buildings, hospitals – all that stuff. The cool part is, instead of buying a whole building yourself (which, let’s be real, is not happening anytime soon for me), you can buy shares in the REIT. And because REITs are legally required to distribute a large portion of their taxable income to shareholders, you potentially get dividends. Dividends = passive income. Or, at least, that’s the theory.
The thing is, even after reading a bunch of articles, I was still a little fuzzy. It’s kind of like trying to understand how a car engine works. You can read all the explanations in the world, but until you actually see one taken apart, it’s just a bunch of abstract concepts. It took me actually *investing* (and making a few mistakes) to really get the hang of it. And that’s what I want to share here.
My First Foray into REIT Investing: High Hopes, Low Knowledge
So, armed with a basic understanding (or, maybe a *misunderstanding*) of REITs, I decided to take the plunge. I used a popular investing app; you know, the one that everyone and their grandma seems to be using. I won’t name names, but let’s just say it rhymes with “obbinhood.” I figured, hey, how hard could it be? Just pick a REIT, buy some shares, and watch the dividends roll in, right? Wrong. So, so wrong.
I didn’t do nearly enough research, honestly. I saw a REIT with a high dividend yield. Huge red flag, I know that now, but back then, I was blinded by the promise of easy money. It was a mortgage REIT, specializing in, well, mortgages. Specifically, they were heavily invested in…commercial mortgages. This was around late 2022, early 2023. Anyone remember what was going on with commercial real estate at that time? Yeah, not good.
Offices were emptying out because of remote work, interest rates were climbing, and everyone was worried about a recession. But me? I was focused on that juicy dividend yield. I bought a few shares, feeling like a genius investor. I even bragged to a friend about my brilliant move. Ugh, cringe.
The Inevitable Downward Spiral: A Hard Lesson Learned
You can probably guess what happened next. The REIT’s share price started to decline. Slowly at first, and then, BAM! It was like watching a slow-motion train wreck. The high dividend yield? Turns out it was high because the stock price was plummeting! It’s like they say: if something seems too good to be true, it probably is. I remember checking my portfolio every day, watching the red numbers grow larger and larger. It was painful.
I held on, hoping for a turnaround. “It has to bounce back eventually,” I told myself. Classic investing mistake, right? Holding onto a loser, hoping it will magically become a winner. I stayed up until 2 a.m. some nights, frantically reading articles and trying to understand what was going on with commercial real estate. It felt like I was drowning in financial jargon.
Eventually, I couldn’t take it anymore. I sold my shares, taking a significant loss. Ugh, what a mess! Honestly, I felt like an idiot. I had let greed and a lack of knowledge cloud my judgment. It was a hard lesson, but a valuable one. It taught me the importance of doing your homework *before* investing, not after your portfolio is bleeding red ink.
Digging Deeper: Understanding Different Types of REITs
After licking my wounds (and doing a *lot* more research), I realized that there’s a whole world of different REITs out there. My initial mistake was jumping into a mortgage REIT without understanding the risks associated with rising interest rates and the state of the commercial real estate market. Now, I know that mortgage REITs generally make money from the difference between the interest they earn on mortgages and the cost of borrowing money to fund those mortgages. Rising interest rates can squeeze those margins.
There are also equity REITs, which own and operate properties. Within equity REITs, there are different sectors, like retail REITs (owning shopping malls), healthcare REITs (owning hospitals and nursing homes), industrial REITs (owning warehouses), and residential REITs (owning apartment buildings). Each sector has its own unique risks and opportunities. For example, retail REITs might struggle if online shopping continues to grow, while healthcare REITs might benefit from an aging population.
It’s kind of like diversifying your stock portfolio – you don’t want to put all your eggs in one basket. The same goes for REITs. You wouldn’t want to invest solely in retail REITs if you think the future of retail is uncertain. Learning about these different types was really eye-opening. Suddenly, REITs seemed less like a confusing blob and more like a collection of diverse businesses, each with its own story to tell.
REITs and the Stock Market: Correlation (or Lack Thereof?)
One thing that surprised me was how REITs can behave differently from the overall stock market. You’d think that if the S&P 500 is doing well, REITs would also be riding high, right? Not always. Sometimes, they move in opposite directions. This is because REITs are often influenced by factors that don’t necessarily affect the broader market, such as interest rates, real estate trends, and inflation.
For example, rising interest rates can negatively impact REITs because they increase borrowing costs. This can make it more expensive for REITs to acquire new properties or refinance existing debt. On the other hand, inflation can sometimes benefit REITs because it can lead to higher rents and property values. It’s a balancing act, and understanding these dynamics is crucial.
I remember one particular week where the stock market was having a great run, but my REIT investments were lagging behind. I was initially frustrated, but then I remembered what I had learned about the correlation between REITs and the stock market. It helped me stay calm and avoid making any rash decisions. Thinking about it, it’s kind of freeing in a way. Not *everything* has to correlate perfectly.
My (Slightly) Wiser Approach to REIT Investing Now
So, where am I now? Well, I’m still investing in REITs, but with a much more informed and cautious approach. I no longer chase high dividend yields without understanding the underlying risks. I spend more time researching the REIT’s management team, its financial performance, and the specific sector it operates in. I also pay close attention to interest rate trends and the overall economic outlook.
I also diversified my REIT holdings, investing in different sectors. I have some exposure to residential REITs, which I believe will benefit from the ongoing housing shortage. I also have some investments in industrial REITs, which are benefiting from the growth of e-commerce.
It’s been a learning process, that’s for sure. And I’m not saying I’m some expert now. Far from it! But I’ve definitely learned a thing or two (or ten) about REITs, and I’m feeling much more confident in my investment decisions. I also started using a REIT screener to help me find potentially undervalued REITs. It’s kind of like online dating, but for investments.
Final Thoughts: REITs Aren’t a “Get Rich Quick” Scheme
The biggest takeaway from my REIT journey is that they are not a “get rich quick” scheme. They require research, patience, and a willingness to learn. Just like any other investment, there are risks involved. But, with a little bit of knowledge and a disciplined approach, REITs can be a valuable addition to a diversified portfolio.
Don’t be like me and jump in headfirst without knowing what you’re doing. Take the time to understand the different types of REITs, the factors that influence their performance, and your own risk tolerance. And remember, past performance is not indicative of future results.
If you’re as curious as I was, you might want to dig into understanding balance sheets or even explore the history of real estate cycles. It all contributes to a better understanding.
Ultimately, investing is a personal journey. What works for me might not work for you. But I hope my experience has shed some light on the world of REITs and helped you avoid some of the mistakes I made along the way. Now, if you’ll excuse me, I’m going to go check my portfolio…again.
