Learn › Investing in REITs · 7 min read

Common REIT Investing Mistakes

Common missteps investors make with REITs, from chasing yield to ignoring leverage and misreading standard net income figures

Chasing the highest yield without checking coverage

An unusually high yield relative to a REIT's peers or its own history is sometimes a genuine bargain, but it is often a sign that the market doubts the current dividend is sustainable. Buying based on yield alone, without checking whether the payout is comfortably covered by FFO or AFFO, is one of the more common ways investors end up holding a dividend that later gets cut. It helps to ask what the market might already know or suspect about a company before assuming a high yield is simply an overlooked opportunity. See dividend yield explained and dividend safety for how to evaluate a yield rather than just react to it.

Judging REITs by net income or a P/E ratio

Applying a standard stock-picking habit, comparing net income or a price-to-earnings ratio, does not translate well to REITs, because real estate depreciation charges distort net income in ways that do not reflect the underlying cash flow. A P/E ratio calculated the normal way can even show a REIT trading at what looks like a very high multiple, or produce a negative, meaningless figure, purely because of a large depreciation charge, without saying anything meaningful about the business. Investors new to REITs sometimes flag a company as "expensive" or "cheap" based on a P/E ratio that is not really measuring what they think it is measuring. This does not mean net income is useless for a REIT, only that it needs to be read alongside FFO and AFFO rather than treated as the primary measure of performance. See FFO vs. net income for why the industry uses a different starting point.

Skipping the balance sheet

Because REITs typically use debt to finance growth, leverage and debt maturities are a central part of the risk picture, not a side detail. Investors who focus only on yield and property type while ignoring how a REIT is financed can be caught off guard when rising rates or a tightening lending environment hit a heavily indebted company harder than a conservatively financed one. Two REITs with similar current yields can carry very different levels of financial risk once their debt loads and maturity schedules are taken into account. See net debt/EBITDA and leverage for what to check.

Treating REITs as a single, uniform investment

REIT is a tax structure, not a business model — a data center REIT, a hotel REIT, and an apartment REIT can have very different growth drivers, tenant relationships, and sensitivity to the economy, even though all three file the same type of tax election. Lumping all REITs together, positive or negative, overlooks how differently sectors can perform in a given environment. The sectors overview breaks down those differences property type by property type.

Ending up concentrated without realizing it

Buying several REITs can feel diversified simply because the tickers are different, even when the holdings are all concentrated in the same sector, region, or type of economic exposure. That kind of hidden concentration undermines the diversification an investor may think they have. Reviewing a portfolio's actual weightings periodically, rather than assuming diversification because the list of tickers looks varied, is a simple habit that catches this before it becomes a larger problem. See building a REIT income portfolio for how to think about spreading exposure deliberately.

Overlooking dilution from share issuance

REITs often fund growth partly by issuing new shares, since the requirement to distribute most taxable income leaves less retained cash available for reinvestment than a typical company might have. Issuing new equity is not inherently bad; if the money is invested at attractive returns, it can grow FFO and AFFO per share over time even though the share count rises. But issuance that outpaces the growth in cash flow it funds can quietly dilute existing shareholders on a per-share basis, which is one reason it is worth watching a REIT's growth in FFO per share, not just its growth in total FFO. Reviewing per-share FFO and AFFO trends over several years, not just the totals, is a simple way to keep an eye on this.

Overlooking how the dividends will be taxed

Because most REIT dividends are taxed as ordinary income rather than at the lower qualified-dividend rate, investors who hold REITs in a taxable account are sometimes surprised by the tax bill relative to what they expected from a typical dividend stock. See how REIT dividends are taxed and REITs in IRAs and 401(k)s for the general mechanics; a tax professional can advise on how these rules apply to your own situation.

See it in the data: Screen REITs → Browse sectors →

Research and education only — nothing here is investment advice. Figures such as the 90% distribution rule are general and can change; always confirm against a company's filings.