Course 503: Unconventional Equities
Drawbacks of REITs
In this course
1 Introduction
2 Benefits of REITs
3 Drawbacks of REITs
4 Benefits of MLPs
5 Drawbacks of MLPs
6 Benefits of Royalty Trusts
7 Drawbacks of Royalty Trusts
8 The Bottom Line

REITs also have some drawbacks, including:

Sensitive to Demand for Other High-Yield Assets. Generally, rising interest rates could make Treasury securities more attractive, drawing funds away from REITs and lowering their share prices.

Property Taxes. REITs must pay property taxes, which can make up as much as 25% of total operating expenses. State and municipal authorities could increase property taxes to make up for budget shortfalls, reducing cash flows to shareholders.

Tax Rates. One of the downsides to the high yield of REITs is that taxes are due on dividends, and the tax rates are typically higher than the 15% most dividends are currently taxed at. This is because a large chunk of a REIT's dividends (typically about three quarters, though it varies widely by REIT) is considered ordinary income, which is usually taxed at a higher rate.

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