Are Mortgage REITs Too Risky for Me?
For the average investor, the answer is yes.
Though many investment advisers will say new mortgage REITs are great investment vehicles for certain investors, the truth is they're simply too risky for most. Average investors are generally looking to maximize their returns while minimizing their risk. REITs are not usually appropriate for these investors.
REITs are complicated, and they carry hefty commissions, upfront costs, and ongoing fees. They're also typically focused on one type of real estate, which means they're more vulnerable to market changes than more diverse products.
Currently, for example, mortgage REITs (which use mortgage-backed securities as collateral to borrow money and buy bonds) are advertising dividends of 14 to 20 percent. But, those dividend payments are anything but stable. If the cost of borrowing goes up, or investors get worried the market will freeze, the yields could plummet. The latter is exactly what happened just a few days ago, when worries over the potential for a U.S. default sent the market into a panic. In a matter of hours, some mortgage REITs dropped almost 19 percent.
Still, despite the risks and FINRA's recent warnings about chasing high returns, advisers continue to recommend these products to clients, and investors continue to purchase them. To protect themselves, investors should fully understand how a product works - and the risks involved with the product - before they invest.