REITs – A Great Way to Invest in Real Estate
The housing market seems to be improving in 2012. With home prices rising, less inventory, and record low mortgage rates – investing in real estate seems like a good option to improve your portfolio.
Many people do not want to purchase property as an investment and that is ok. There is another option that seems to be a great low risk investment in the real estate market investing in a REIT.
What is a REIT? That is a good question. A REIT is a Real Estate Investment Trust. A REIT is a company that owns and operate income producing real estate. Many REITs are traded on many stock exchanges
Qualification for Companies to be a REIT
A company must have most of its income and assets tied to investments in real estate
A company must distribute at least 90% of its taxable income to shareholders annually in the form of dividends.
Once Qualified as a REIT
A REIT is allowed to deduct dividends paid to its shareholders from its corporate taxable income.
REITs historically remit at least 100% of their taxable income to their shareholders and therefore will not own any corporate tax.
The taxes are paid by shareholders on the dividends received and on all capital gains.
A REIT cannot pass any tax losses through to its investors.
Types of REITS
Retail REITs
Approximately 24% of REIT investments are in shopping malls and freestanding retail. When you go to you favorite shopping center, it is more than likely owned by a REIT. There are some things you need to consider when thinking about investing in retail real estate
Always examine the retail industry as a whole
What is the present outlook – is it healthy?
How strong does the future look in this industry?
Retail REITs make money from the rents they charge- if retailers have cash issues due to declining sales it could result in loss of retailers. This is why having REITs with strong anchor retailers like home improvement stores or grocery stores.
Residential REITs
The Residential REITS own and operate multi-unit apartment buildings and manufactured housing. There are factors to look at when investing in a residential REIT.
Look for REITs that are in markets where home affordability is low- compared to the rest of the country. Good examples of this would be Los Angeles and New York. The cost of housing is incredibly high in these cities it causes two thing to happen
It forces many people into renting because they cannot afford to own
It drives up rental prices landlords can charge.
Look for REITsS that focus in on large metropolitan urban areas- where apartment supplies remain low and demand continues to rise.
Healthcare REITs
Healthcare REITs invest mainly in hospitals, medical centers, nursing facilities and retirement homes. How successful a healthcare REIT is- is directly related to how successful the healthcare system is. Many healthcare facility operators rely on occupancy fees- Medicare, Medicaid, and private funds. If funding for healthcare remains a big questions – healthcare REITs could lose strength.
What to Look for in Health Care REITS
Investments in many different property types with diversified
Look for companies that have strong healthcare experience
Office REITs
Office REITs are exactly that they invest in office buildings. These REITs receive rental income from long- term leases.
Questions to Ask
How strong is the economy and what are unemployment rates? Specifically, how high is unemployment?
What are typical vacancy rates?
How strong is the economy is the areas that the REIT is investing in?
The philosophy is that it is better to have many avergage buildings in a major area like New York , than prime office space in a depressed market like Detroit.
(For more on commercial real estate, see Find Fortune In Commerical Real Estate.)
Mortgage REITs
Around 10% of REIT investments are in mortgages not the actual real estate itself. The best investments are Fannie Mae and Freddie Mac. The government buying mortgages on the secondary market.
Investing in mortgages and not in equity still has its risks
An increase in interest rates would mean a decrease in the REIT value.
If interest rates rise, funding will be more expensive. This reduces the value of all the loans in the REIT portfolio.
Assessing REITS
The Keys to Assessing Any REIT (Provided by Investopedia)
As an investor assessing every investment is a must. There are a few things to keep in mind when assessing any REIT you are thinking about investing in.
REITs are true total-return investments. Look for companies that provide high divedend yiels and moderate long term capital appreciation. Make sure a company has done a good job providing over a long period of time.
REITs are traded on stock exchanges. You get the diversification real estate provides without being locked in long term. Liquidity matters.
Depreciation tends to overstate an investment’s decline in property value. Thus, instead of using the payout ratio (what dividend investors use) to assess an REIT, look at its funds from operations (FFO) instead. This is defined as net income less the sale of any property in a given year and depreciation. Simply take the dividend per share and divide by the FFO per share. The higher the yield the better.
Strong management makes a difference. Look for companies that have been around for a while or at least possess a management team with loads of experience.
Quality counts. Only invest in REITs with great properties and tenants.
Consider buying a mutual fund or ETF that invests in REITs, and leave the research and buying to the pros.
Chad Schernikau – Metro Atlanta Realtor®
Selling a Metro Atlanta home involves many steps and having an experienced Metro Atlanta Real Estate Agent by your side makes the transaction much smoother. It is my honor to represent you as a Metro Atlanta Real Estate Professional! I assist buyers and sellers in the Metro Atlanta Area with all aspects of the real estate process including the purchasing and selling of residential real estate.
As a Metro Atlanta Buyer’s Agent, I have received special training to guide and educate you through the entire home buying process. From start to finish, I listen to your needs and desires regarding what you would like and I use this information to assist you in finding your perfect home.
As your Metro Atlanta listing agent I am well versed on the local Metro Atlanta Real Estate Market. Expect personalized service including a detailed consultation that competitively positions your home in today’s market. The consultation will include an in depth comparative market analysis, advice on staging, and a customized marketing plan. This is all tailored specifically to your home and area using the latest and most up-to-date marketing methods to get your home in front of as many buyers as possible.
Being a Metro Atlanta Real estate Agent not only involves finding your home or selling your home, but also being your guide, negotiator, advisor, and advocate. I make sure all your needs and goals are met.
“Helping Families Find Their Way Home!”
