Spot the Red Flags Before They Sink Your Portfolio
Real Estate Investment Trusts (REITs) can be a powerful tool in your retirement portfolio. They offer attractive yields, diversification, and steady income without the hassle of being a landlord. But not all REITs are created equal—and some can do more harm than good.
The riskiest REITs often lure investors with sky-high dividend yields, but behind the scenes, they may be struggling with too much debt, weak cash flows, or poor management decisions.
In this post we’ll show you how to spot the warning signs before investing—and share two real-life examples of REITs that ran into trouble.
🚨 Red Flag #1: Unsustainable Dividend Yields
We all love big dividends. But when a REIT is paying 12%, 15%, or even 20%, that should raise an eyebrow. Why?
Because most high-quality REITs—those with solid properties and strong financials—typically yield 4% to 8%. Anything above that often means:
- The stock price has dropped sharply (bad news)
- The market doesn’t trust the dividend will last
- The company may be borrowing or selling assets just to pay dividends
What to look for instead:
- A payout ratio under 80% of Funds from Operations (FFO)
- A history of maintaining or growing the dividend
- Clear communication from management on how the dividend is supported
🚨 Red Flag #2: High Leverage and Debt Problems
Some REITs take on too much debt to fuel growth. While leverage is normal in real estate, excessive debt becomes a problem when:
- Interest rates rise (as they have recently)
- Property values decline
- Occupancy drops
A REIT that’s drowning in debt can quickly spiral into dividend cuts, asset sales, and shareholder losses.
What to look for instead:
- Debt-to-equity ratio under 1.0
- Interest coverage ratio of at least 2x
- Long-term debt that’s staggered, not all maturing at once
- Minimal use of short-term borrowing to fund long-term assets
🚨 Red Flag #3: Weak or Questionable Management
Behind every REIT is a management team. And bad decisions—like overpaying for properties, growing too fast, or ignoring market shifts—can sink even the best portfolios.
Watch out for:
- Frequent equity offerings that dilute shareholders
- Complex or unclear fee structures
- Lack of transparency in earnings calls and investor materials
Look for REITs with:
- Experienced leadership teams
- Proven track records through multiple real estate cycles
- Strong alignment between management and shareholders
🏚️ Real-Life Example #1: Office Properties Income Trust (OPI)
Dividend Yield (prior to cut): Over 15%
What went wrong:
OPI was a high-yielding REIT focused on office properties—many leased to government and corporate tenants. But when the pandemic changed how and where people work, demand for office space dropped significantly.
Despite warning signs, OPI kept its dividend high—until 2023, when it slashed the dividend by over 80% and proposed a controversial merger with another struggling REIT, Diversified Healthcare Trust (DHC). The market didn’t react well.
The Red Flags:
- Dividend far outpaced cash flows
- High debt and falling occupancy rates
- Poor communication and transparency from management
📉 Investors who chased the 15% yield saw their principal drop dramatically and their income slashed.
🏢 Real-Life Example #2: Global Net Lease (GNL)
Dividend Yield (as of 2024): Around 15%
What’s happening:
GNL invests in office, industrial, and retail properties globally. It has a long history of high dividends—but its total returns (including stock price performance) have been disappointing.
Over the last few years, the stock price has declined due to:
- Concerns about overleveraging
- A lack of dividend coverage from actual earnings
- Governance concerns due to external management fees that may not align with shareholder interests
The Red Flags:
- High payout ratio despite weak cash flow
- Negative total return despite high yield
- Heavy use of debt with uncertain refinancing plans
⚠️ GNL’s high yield might look tempting, but investors have been losing money overall—despite the big dividends.
✅ What to Look for in a Safer REIT
Now that you know what to avoid, here’s what to focus on when building a portfolio of dependable, income-producing REITs:
✔ Strong Balance Sheets
Look for REITs with manageable debt and plenty of liquidity to weather downturns.
✔ Sustainable Dividend Policies
Focus on companies with realistic payout ratios and a track record of maintaining or growing distributions.
✔ Quality Assets
Properties in growing markets, with long-term leases and creditworthy tenants, are more likely to generate reliable income.
✔ Clear, Aligned Management
Avoid REITs with opaque fee structures or poor communication. Prioritize those with internal management and a history of putting shareholders first.
✔ Favorable Sector Trends
REITs in sectors like industrial, data centers, healthcare, or residential tend to have better long-term prospects than those concentrated in struggling office or retail segments.
🧩 Final Thought: Protect Your Income and Your Peace of Mind
REITs can be a powerful tool for generating steady retirement income—but only if you choose the right ones. By avoiding REITs with excessive debt, risky yields, or misaligned management, you protect both your dividends and your capital.
The best REITs won’t make headlines—but they’ll quietly pay you every month or quarter, year after year.
When in doubt, remember: if it looks too good to be true, it probably is.
📘 This post is adapted from my book:
The Passive Landlord: Earn Safe 12% Returns Investing in REITs
Available now at Amazon.com in paperback and eBook formats.
Disclaimer: This blog post is for informational purposes only and does not constitute financial, investment, or tax advice. Investing involves risk, and past performance is not indicative of future results. Always consult with a qualified advisor before making investment decisions.