Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you investment advice on stocks and other topics that will help you develop a successful approach to investing. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Today’s tip: “When you look at the way some investments are marketed to investors, you may find that the supposed benefits are actually drawbacks.”

One key aspect of a marketer’s job is to describe the features of whatever he’s 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 investments.

A perfect illustration of this is a question one of our Inner Circle members asked about a little-known income investment he had heard about that was yielding 9% at the time. That’s a super yield at a time of low interest rates. But a high yield is very often a sign that you need to look for hidden risks. We looked and there they were, dressed up as investor benefits.

The investment was a REIT (real estate investment trust) that specializes in small-town real estate—a private REIT and so not publicly traded (more about that below). Promotional material for the REIT portrayed this investing strategy as a benefit to investors. It explained that small-town real estate investments 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.

Invest in your Financial Future for FREE Learn everything you need to know in '9 Secrets of Successful Wealth Management' for FREE from The Successful Investor. Secrets of Successful Wealth Management: 9 steps to the life you've always wanted, before and after retirement.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Two supposed “benefits” were the main reasons not to invest

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.

This particular REIT was private, unlike conventional REITs, which are publicly traded. That means the REIT was calculating the value on its units (just once a year in this case), and wasn’t required to reveal all the information that’s available to the public from publicly traded investments. The REIT portrayed this feature as a benefit—because 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 hidden risks and problems that the REIT happens to suffer from.

In this case, the combination of two highly-touted “benefits”—a small-town focus plus a once-a-year valuation by the REIT’s insiders—were enough to make me advise against investing. It’s always worthwhile to take a second look at the marketing for investment products to see whether the benefits may actually do more harm than good in the long run.

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

Have you ever made an investment that stands out to you as having failed to deliver what it advertised? Do you believe the claims for that investment were deliberately misleading? Or were they simply exaggerated for marketing purposes? Let us know what you think.