Risk of a REIT in an IRA

Original post by Geri Terzo of Demand Media

An investor cannot turn to a traditional stock broker to invest in REITs for an IRA.

The advent of Real Estate Investment Trust (REIT) investing has made it possible for regular investors to gain exposure to commercial real estate. REIT investing is more practical and affordable than purchasing office buildings and shopping malls, for instance. Investors who gain exposure to REITs through an IRA are also inheriting certain risks. REITs proved to be susceptible to drastic declines throughout the economic recession of 2008, and are not always the stable income providers that many investors seek.

1 Type
2 Bankruptcy
3 Performance
4 Trend

Type

In order to make REIT selections in an IRA, you can open a self-directed IRA plan with a plan administrator. However, there is a somewhat opaque regulatory framework surrounding self-directed accounts. To understand the accountability that an IRA administrator is subject to, you must investigate which regulatory body oversees the plan. It could be one of several regulators. You must also appoint the appropriate type of custodian to perform complex investment transactions. If you attempt to make REIT investments using IRA assets without a custodian, it is possible that the allocation will not be made correctly.

Bankruptcy

A concern for IRA holders with exposure to REITs is the possibility that one of the key components in an index will file for bankruptcy. A corporate bankruptcy could take months or even years to unfold, while REIT income could be compromised. In 2011, even as retailers began leasing space in shopping centers again, strength in REITs was expected to be overshadowed by the bankruptcies of book and movie retailers.

Performance

REIT performance is dependent on the renting and leasing markets. When there is a market downturn, REIT income suffers. In 2007 and 2008, REITs declined approximately 18 percent and 37 percent, respectively as problems in the real estate market surfaced. This performance is troubling for any investor, but it is especially alarming for individuals who are investing for retirement. You should aim for a diversified portfolio to compensate for the risks involved in any one sector or industry.

Trend

Investors often turn to the REIT market for diversification and to gain exposure to some asset class that is not tied to the performance of traditional investment categories, such as stocks and bonds. In 2010, REIT performance began to take on some of the same characteristics as stock-market trading. The stable income that REITs traditionally provide was being replaced by volatile returns driven by a shift in the structure, and the market participants managing REITs.

References

About the Author

Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.

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