Before Investing in REITs



Investors are happy about the Pro-business incentives like low-interest rates. Because of this, investors are looking for financial instruments that promise high returns. REITs are on top of the list for the best investment opportunity.

REITs, the Real Estate Investment Trust refers to the type of security invested in real estate through mortgages and properties on major exchanges.

Real Estate Investment Trust are attractive because they are generally exempted from the federal income taxes at the corporate level, and they have a dividend payout ratio of about 90 percent.

Despite the promise of high returns, investors are skeptical to inject funds into a high-risk business environment. This is because the high-interest rates increase the cost of debt financing and REITS come with debts as they are acquisitive. But, despite these facts, you can still invest in REITs in a high-interest environment if the rise in interest rates is a result of a strengthening economy.

But that isn’t all that you need to consider before investing in REITs: even with the high demand for property.

Types of REITs: what are you interested in and which sector of the economy are you more knowledgeable in? These questions are crucial as they determine whether you will invest in retail, residential, healthcare, mortgage or office REITs. Keep in mind that the values of the investments rise or drop depending on the existing market conditions.

Understand how REITs work: investment in REITs is simply an investment in commercial property where you either acquire it or develop the property from the ground up. The property is then rented out and the rental income generated distributed to the shareholders as dividends.

As mentioned above, you get up to 90 percent of the taxable income annually. As an investor, you avoid double taxation. You also avoid paying the corporate tax.

Which risks are involved? All investments come with risks. However, how much risk is associated with the chosen REITs? As with every investment, the interest rate risk is big  because high-interest rates create a downward pressure on the prices of Real Estate Investment Stocks.

You should also be aware of the company and sector-specific risks because some estates are defensive. Others do well in strong economies but get hard hit in case of recessions.

Understand the metrics used to evaluate Real Estate Investment Trust: Since the traditional metrics for evaluating stocks don’t apply to REITs, you have to be more careful. In REITs, you need to understand FFO or Funds from Operations. FFO is a version of earnings, and it adds back to the property’s depreciation. It also makes adjustments that accurately show income which influences the dividend payout ratio.

The cap rate, intrinsic value, debt coverage and the net asset value are the other features you should be aware of.

Final Thoughts

Real Estate Investment Trust can provide real returns on investment, and when you invest in quality properties, then you are guaranteed total return investments. The management of the property should be solid, and you may want to buy a mutual fund that invests in REITs because they will only invest in the best properties.

Chris Porter About Chris Porter

“Chris Porteous has significant experience in the financial markets with stints at Goldman Sachs, UBS Securities and DBRS. At DBRS, Chris extensively covered the Mortgage Backed Securities market, Covered Bonds and regulatory changes involved in the real estate markets. Chris currently runs a personal Real Estate Investment Trust with over 15 properties located in South Florida.”

Sign up Now and get our guide on Facebook for Real Estate Professionals for Free

Sign up to the Realty Biz News mailing list to get updates from our site and also get our guide to Facebook marketing for Real Estate professionals for free