- Real estate investment trusts own hard assets, giving investors some downside protection
- Stocks that typically crash to $0 are fledgling companies or those that seek bankruptcy protection
- REITs, though, can still suffer big declines and they did fall 75% in the financial crisis
USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at [email protected].
Q: If I buy real estate investment trusts, can the value of them go to zero?
A: Stocks don't go to zero very often. But it can, and does, happen.
When a company files for bankruptcy protection, for instance, it's almost a certainty the common shares will fall to $0 or get pretty close. Also, up-and-coming growth stocks that never turn a profit and burn through their cash can also crash to $0. Just ask investors in many dot-com stocks a few years ago.
But real estate investment trusts, or REITs, are very different than the typical stocks that fall to $0. REITs invest in real estate, typically commercial property like office buildings and apartments that have market value. REITs are structured to collect the income generated by these properties and return most of it to investors in the form of a dividend.
The dividends paid by REITs are making them a big draw in the market. The Vanguard REIT Index exchange traded fund, which invests in a basket of REITs, is currently yielding 3.4%. That tops the roughly 2% yield of the Standard & Poor's 500.
But since REITs are invested in property, there's more protection against the horror show of having shares crash to $0. By law, 75% of a REITs asset must be invested in real estate. The market value of the property owned by the REIT offers a bit of protection, as long as the value of the property doesn't go to zero.
That's not to say that REIT values can't go down, though. During disruptions in the real estate market, including in the financial crisis of late 2000, real-estate prices and REITs can suffer in a big way.
The Vanguard REIT ETF, for instance, fell 75% from its high in February 2007 to its low in March 2009. That's a huge hit, but if it's any consolation, shares didn't go to zero, they bottomed out at roughly $20 a share.
