Why Have Mortgage-Backed Real Estate Investment Trusts (REITs) Not Performed Well Recently?
Real Estate Investment Trusts (REITs) have long been a popular investment avenue for investors seeking a taste of the real estate market without the hassle of direct property management. However, recent trends and challenges have led to underperformance in this sector. Let's explore why mortgage-backed REITs are not performing well lately.
The Hassles of High Fees in REITs
One of the major drawbacks of REITs is the presence of high management fees. These fees are often due to the involvement of numerous intermediaries, each wanting a slice of the pie. Fund managers, brokers, and other intermediaries add layers of complexity, which can significantly impact your returns.
The Institutional Nature of REITs
REITs are typically managed by large, institutional organizations aimed at catering to a broad audience. While this may sound appealing, it can also lead to a sense of impersonal management. The big organizations often have standardized processes and procedures, which can sometimes feel less personalized than direct investments.
Impact of High Interest Rates on Mortgage-Backed REITs
The Role of Interest Rates
The current economic landscape is marked by some of the highest interest rates in over two decades. This surge in interest rates has led to increased costs for borrowing money for mortgages. The difference in monthly payments can be substantial, even on smaller loans. For example, a small loan at a 7% interest rate would require higher monthly payments compared to the same loan at a 2% interest rate.
My Personal Journey with Real Estate Investing
Direct Investment: A Game-Changer
Back in 2009, I took a leap into rental properties with direct investment. This hands-on approach allowed me to have complete control over my property choices and investment strategies. By picking my properties strategically, I was able to maximize my returns and secure some impressive gains.
Syndications and Private Placements: Ladder of Investment
As my investment journey progressed, I expanded into syndications and private placements. These collaborative investment models allow for more control over specific projects and a shared risk-reward profile. By partnering with fellow investors, I could diversify my investment portfolio and potentially achieve higher returns.
Conclusion
The underperformance of mortgage-backed REITs in recent years is a combination of high fees, less personalized management, and the impact of rising interest rates. While REITs offer a path to real estate investment, they come with various challenges. Investors should carefully consider their options and explore alternative investment strategies such as direct investment or participation in private placements.