Real Estate Investment Trusts (REITs) Are Good Short-Term Investments: Truth or Myth?

It was the fastest decision Mark had ever made, and perhaps the most profitable one, at least in the beginning. He had been hearing about Real Estate Investment Trusts (REITs) for months, and in a whirlwind move, he threw $50,000 into what seemed like the perfect short-term investment. The returns were steady, the dividends reliable, and he thought he had found the ultimate short-term vehicle for wealth creation. Fast forward six months, and Mark was no longer smiling. His REITs had tanked, alongside the rest of the market, and his short-term strategy had suddenly turned long-term—without his consent.

The allure of REITs is powerful. Promising regular dividend payouts and often seen as stable investments backed by tangible assets, it's easy to understand why many investors are drawn to them. But is it true that they are suitable for short-term investment strategies? The short answer: not really, and here’s why.

The Misconception of Short-Term Gains in REITs

Many people, like Mark, enter the world of REITs with the expectation of quick returns. They hear about the high dividends, low volatility compared to stocks, and the fact that REITs are typically backed by real estate—something solid and tangible. However, these investors often miss a crucial aspect of what makes REITs work: they are inherently long-term investments.

REITs generate income primarily through the acquisition, management, and sale of real estate properties. These properties do not experience dramatic value changes overnight, meaning the real benefits of owning REITs—stable income and potential appreciation—take time to materialize. The key to REIT success is compounding over years, not months.

Market Cycles and REIT Sensitivity

REITs are particularly sensitive to market cycles. In times of economic expansion, the demand for properties typically increases, raising the value of REITs. During recessions, however, the opposite occurs. Real estate tends to decline in value, and so do the dividends paid out by REITs. For a short-term investor, this cycle can be disastrous if they enter the market at the wrong time.

For example, in the 2008 financial crisis, REITs suffered significant losses as the real estate market plummeted. Investors who had taken a short-term approach found themselves stuck with assets that had declined in value by 30% or more. In contrast, long-term investors who held their positions eventually saw their REITs recover and thrive as the real estate market rebounded.

Timing the market in REITs is not a strategy for the faint-hearted. It requires in-depth knowledge of economic trends, real estate markets, and the ability to foresee interest rate movements—something even seasoned investors find challenging.

Interest Rates: The Unseen Threat

One of the biggest factors affecting REITs is interest rates. When interest rates rise, REITs typically underperform. This is because higher interest rates make borrowing more expensive for real estate development, which can slow down property acquisition and development activities. Additionally, higher interest rates provide competition in the form of bonds and other fixed-income securities, which can offer more attractive yields compared to REIT dividends.

For a short-term investor, rising interest rates can swiftly erode the potential for profit in REITs. Unlike stocks, where short-term price fluctuations are more directly tied to company performance, REITs are deeply influenced by broader economic policies.

The False Sense of Security in Dividends

One of the most attractive aspects of REITs is their high dividend yield. By law, REITs must distribute at least 90% of their taxable income to shareholders in the form of dividends. However, this can lead to a misconception: that REITs are always a good source of income, regardless of market conditions.

While dividends provide regular income, they are not guaranteed. REITs can and do cut their dividends during tough economic times, as we saw during the COVID-19 pandemic. Investors who rely on those dividends for short-term income may find themselves in a bind when those payouts are reduced or eliminated altogether.

REIT Liquidity: A Double-Edged Sword

Another reason some investors consider REITs for short-term investment is liquidity. Unlike traditional real estate, which can take months to sell, publicly traded REITs can be bought and sold quickly, just like stocks. But this liquidity can be a trap. When REIT prices fall, as they often do in volatile markets, short-term investors may panic and sell at a loss, missing out on future gains.

The ability to quickly liquidate a REIT investment is only an advantage if you're disciplined enough to ride out market fluctuations. Unfortunately, most short-term investors lack the patience needed to see a recovery, leading them to lock in losses.

Real Estate's Natural Long-Term Nature

Real estate is a notoriously slow-moving asset class. Unlike tech stocks that can double in value overnight based on innovation, real estate appreciates steadily over time. The same is true for REITs. They are not designed to provide quick returns. Instead, they offer slow and steady growth, underpinned by the gradual appreciation of real estate assets and rental income.

For investors with a short-term horizon, this slow growth can feel frustrating. But for long-term investors, it’s this very predictability that makes REITs so attractive. Over 10 or 20 years, REITs can provide both income and capital appreciation, making them an ideal component of a retirement portfolio or long-term investment strategy.

Case Study: The 5-Year REIT Hold

Consider Sarah, a long-term investor who purchased $100,000 in REITs five years ago. Over that time, her REITs paid an average dividend of 4% annually, providing her with $20,000 in income. Meanwhile, the value of her REIT shares appreciated by 30%, giving her an additional $30,000 in capital gains. After five years, Sarah’s total return was $50,000, or 50% of her initial investment.

Now, imagine if Sarah had sold her REITs after just one year. She would have collected only $4,000 in dividends and seen a modest 2% capital appreciation, giving her a total return of $6,000. By staying invested, Sarah was able to dramatically increase her returns over time.

This example highlights the difference between short-term and long-term investing in REITs. While Sarah’s REITs performed well over five years, they were not an effective short-term investment. Her gains came from a combination of dividends and capital appreciation—both of which took time to accumulate.

Conclusion: REITs Are Best for the Patient Investor

In summary, while REITs offer many benefits, including regular income and diversification, they are not well-suited for short-term investments. Their reliance on real estate market cycles, interest rates, and slow capital appreciation makes them more appropriate for long-term strategies.

For investors seeking short-term gains, other investment vehicles—such as stocks, options, or even cryptocurrency—may offer more immediate returns, albeit with higher risk. But for those willing to be patient, REITs can provide steady income and capital growth over the long haul.

Ultimately, the myth that REITs are good for short-term investments is just that—a myth. If you're looking to make quick profits, REITs are not the answer. But if you're willing to take a long-term approach, they can be a powerful tool for building wealth over time.