Worked for a few years, saved some money. Let's say $100,000. Take that $100,000, borrow some (leverage), say at an interest rate of 4%. Let's assume $100,000 + $100,000, giving a total capital of $200,000. Put everything in REITs, yielding say 6% annually - i.e. $12,000. Pay $4,000 in interest. And still, make $8,000. That's an 8% yield over a starting capital of $100,000! Sounds good right? The numbers seem credible under such a low interest rate environment.
Let's play out this scenario ...
There is an economic downturn resulting in a drop in the valuation of REITs. The 6% yield may be there, but it is now against a lower valuation. So suppose the value of the REITs drops 30%. The $200,000 worth of REITs (at cost) is now worth only $140,000. At a 6% yield, that now
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