How to Evaluate REITs and Real Estate Funds (The 7 Metrics That Matter)

A 9% dividend sounds great. Until you realize the REIT is paying you back your own money.

Here's the trap: the fund's net asset value is dropping. So that fat yield? Part of it is return of capital—you're getting your principal back, not income from the properties. Over time, your shares are worth less. You're not earning; you're slowly liquidating. And most investors never look past the yield number.

Evaluating REITs and real estate funds isn't hard. You just need to know which numbers matter. Here are the seven metrics that separate solid picks from yield traps.

The 7 Metrics That Matter

You'll see yield first. Everyone does. But yield alone tells you almost nothing. The real work is in six other numbers: NAV trend, expense ratio, liquidity, sector mix, debt maturity, and AFFO. Get these right and you'll filter out most of the junk before you ever hit "buy."

Dividend Yield (Don't Stop Here)

Dividend yield is annual dividends divided by share price. Simple. A 6% yield on a $20 share means $1.20 per year. But here's the catch: if the share price is falling because NAV is declining, that yield is partly funded by returning your capital. You're not earning 6% from property income—you're getting a mix of income and principal.

What to do: Check NAV per share over the last 3–5 years. If it's trending down while the dividend holds steady, red flag. The fund may be distributing more than it earns. Inland REIT, for example, saw NAV per share drop 3.5% year-over-year in 2022–2023. High inflation, rising rates, and retail sector stress drove it. Dividends can look fine on the surface while the underlying value erodes.

The rule: Yield + declining NAV = return of capital. Treat it as a warning, not a feature.

Expense Ratio

A 1.5% fund expense ratio sounds small. It's not. That fee compounds against you every year. On a $50,000 investment returning 7% annually, a 1% expense ratio alone can cost you roughly $93,000 in lost growth over 30 years. At 1.5%, you're giving up 30% or more of your potential returns over two decades.

Passive REIT ETFs typically charge under 0.20%. Active or specialized real estate funds often run 1% to 2% or higher. The difference is enormous. A fund charging 1.5% has to outperform a low-cost index by 1.3 percentage points every year just to break even. Most don't.

What to do: Aim for under 1%. Under 0.5% for ETFs. If you're paying more, ask why. Sometimes a higher fee is justified—a niche strategy, active management in an inefficient market. Often it's not. Run the numbers.

Quick math: $50,000 at 7% for 20 years with 0.2% fees grows to about $193,000. Same scenario at 1.5% fees: roughly $135,000. That's $58,000 gone. To fees. Not market loss—just the drag of expense ratios. Over 20 years, 1.5% eats 30% or more of what you would have had. The number seems small. The impact doesn't.

Liquidity

Liquidity is how fast you can get your money out. Publicly traded REITs: you sell when the market's open. Cash in days. Non-traded REITs are different. The SEC warns that liquidity events "might not occur until more than 10 years after your investment." Typical lock-up: 5–7 years, sometimes longer. There's no real secondary market. Some funds offer redemption programs—maybe 20% of NAV per year, 5% per quarter—but managers can limit or shut them down when they need to preserve cash.

What to do: If you might need the money in the next five years, stick to publicly traded REITs or REIT ETFs. Non-traded REITs are for capital you can truly afford to lock up. And feeder funds that funnel into non-traded REITs inherit the same illiquidity—read the fine print.

Real scenario: You put $25,000 into a non-traded REIT in 2019. By 2024 you need the cash—job change, medical bill, whatever. The fund's redemption program is capped at 5% per quarter. You're in a queue. Maybe you get out in six months. Maybe they suspend redemptions. You have no control. That's the trade-off for the extra yield some non-traded REITs advertise. Liquidity matters more when you need it than when you don't.

NAV and Net Asset Value

For non-traded REITs and closed-end funds, NAV is the per-share value of the underlying assets. If the fund trades at a discount to NAV, you might be buying assets for less than they're worth. If it trades at a premium, you're paying more. The gap can change over time. NAV itself can move—property values, cap rates, interest rates all affect it. A declining NAV with a stable or rising dividend is the classic yield trap.

What to do: Check NAV history. Compare share price to NAV. Understand why a discount or premium exists—sometimes it's justified (concentration risk, management), sometimes it's a signal of trouble.

Sector and Debt

Concentration matters. A REIT that's 80% retail faces different risks than one that's 80% multifamily. Sector mix affects cap rate sensitivity, rent growth, and vacancy. And debt: when does it mature? In a rising-rate environment, near-term maturities mean refinancing at higher costs. That can squeeze passive income and share prices.

What to do: Look at sector allocation. Check debt maturity schedule. Prefer funds with staggered maturities and manageable leverage. AFFO (Adjusted Funds From Operations) is a better earnings measure than GAAP for REITs—it accounts for maintenance capital. Compare AFFO to dividends. If payout ratio is above 90% and rising, sustainability is fragile.

Why AFFO? GAAP earnings include depreciation, which doesn't reflect real cash flow for REITs. AFFO subtracts maintenance capex and gives you a clearer picture of what the company can actually distribute. A REIT paying out 95% of AFFO has almost no cushion. One at 70% has room to maintain the dividend through a rough year. Check the filings. It's in there.

Putting It Together

Before you buy any REIT or fund, run through this checklist:

1. Yield + NAV trend — Is NAV stable or rising? If declining, treat yield with skepticism.
2. Expense ratio — Under 1%? Under 0.5% for ETFs?
3. Liquidity — Can you sell when you need to? Or are you locked in for 5–10 years?
4. NAV vs. price — For non-traded: what's the discount or premium? Why?
5. Sector mix — Concentrated or diversified? Does it fit your diversification goals?
6. Debt — Maturity schedule? Refinancing risk?
7. AFFO vs. dividend — Is the payout sustainable?

Seven metrics. Not complicated. A few minutes of homework can save you from a yield trap that looks great on paper and bleeds value over time. Skip the checklist and you might chase a 9% yield straight into a 20% NAV decline. Do the work once. Then you can hold with confidence—or walk away before you're stuck.

The Takeaway

Passive real estate investing doesn't mean passive research. REITs and funds offer liquidity and diversification that direct ownership can't match—but you pay for that convenience in capital gains tax treatment and fees. The 7 metrics above give you a filter. Use it. And if you're weighing REITs vs. buying a property, our comparison breaks down when each makes sense. Get the numbers right first. Everything else follows.