One key aspect of a marketer’s job is to describe the features of whatever he or she is selling as a benefit to the potential buyer. Understanding this process can help you get past the marketing and get better value when you make consumer purchases. It can be an even bigger help in keeping you out of bad financial investments.

Recently a member of Pat McKeough’s Inner Circle asked about a little-known income investment he had heard about that yields 9%. That’s a super yield at a time of low interest rates like today. But a high yield is always a sign that you need to look for hidden risks in financial investments. We looked and there they were, dressed up as investor benefits.

This real estate investment trust’s small town focus is a risk, not a benefit

The investment is a real estate investment trust (REIT) that specializes in small-town real estate. The real estate investment trust’s promotional material portrayed this investing strategy as a benefit to investors. It explained that financial investments in small-town real estate produce above-average returns due to four factors: low supply, high building costs, sustained high demand and low vacancies.

Any or all of these factors can be present in the real estate of a particular market at a particular time. However, things change.

For instance, small towns often depend on at most a handful of employers. If one of the town’s main employers reduces its operations or shuts down, tenants leave town. As populations shrink, the town’s rental accommodation vacancy rate can go up and stay high indefinitely.

This problem is even more pronounced in a small town’s commercial real estate. Offices, storefronts and industrial space are more specialized than residential real estate, due to factors such as zoning, ceiling heights, pedestrian traffic, parking and so on. If apartments stay vacant for months, commercial space can stay vacant for years.

How Successful Investors Get RICH Learn everything you need to know in 'The Canadian Guide on How to Invest in Stocks Successfully' for FREE from The Successful Investor. How to Invest In Stocks Guide: Find 10 factors that make your investments safer and stronger.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Even at the best of times, small-town real estate is harder and more expensive to finance than city properties. Because of the higher risk of cut-offs in rental income, lenders demand bigger down payments and higher mortgage rates. This makes small-town property harder and more expensive to sell.

Small-town real estate has to provide high returns in good times to offset the higher risk of loss when the market turns downward.

Financial investments: Private firms don’t face the same scrutiny as publicly traded companies

This particular REIT is private, unlike conventional real estate investment trusts, which are publicly traded. That means the REIT calculates the value on its units (just once a year in this case), and needn’t reveal all the information that’s available to the public from publicly traded financial investments. It portrays this feature as a benefit — since it avoids the volatility and speculation of public markets!

On the other hand, staying private also cuts the likelihood that nosy outsiders and analysts will find out about and draw attention to any hidden risks or problems that the REIT happens to suffer from.

The combination of these two “benefits” — a small-town focus plus a once-a-year valuation by the REIT’s insiders — were enough to prompt us to advise against investing.

If you have investment-related questions, or if you’d like to ask me about stocks you’re considering buying (or selling), you should join my Inner Circle service. Click here to learn more.