LOOKING TO INVEST WITH REAL ESTATE INVESTMENT COMPANIES (REITS)? READ THIS FIRST
Constructing a fixed income portfolio in real estate by going solo is much difficult and a lot of investors consider real estate investment trusts (REITs) a good option when it comes to generating equity and fixed income. The reasons for this are that
1. REITs provide diversification
2. Potentially higher total returns and
3. Lower overall risk
Basically, people who are not willing to get their hands dirty have a shoulder to rest upon. The ability of these real estate investment companies to generate capital appreciation along with significant dividend income makes them an excellent counterbalance to stocks for the average investor.
What do REITs do?
REITs are real estate investment firms that specialize in acquisition and management of income-producing commercial real estate and also commercial real estate mortgages. You invest in them individually or go through an exchange-traded fund or mutual fund. 90% of REITs own properties, hence, they get most of their income from rents. In addition, all REITs are required by law to distribute 90% of their income to the shareholders.
REITs operate much like the stock market, but unlike the stock market, they are not troubled by inflation. The ability of real estate investments to increase in value during inflation means that REITs provide a measure of stability for investors.
Comparing REITs with the S&P 500 Index from 1975 till date, REITs returns differed by 25 percent points or more, with REITs producing the higher returns in most of those years. REITs have had a long history of good returns. From 1975 to 2014, US REITs produced an annual return of 14.1%, which is more than the 12.2% produced by the S&P’s 500 index SPX.
TYPES OF REIT’s
Whatever shopping mall or grocery store you frequent in America, it is likely owned by a REIT. Shopping malls and freestanding retail represent the single biggest investment type in the US. Hence, 24% of REIT investments are in the retail industry. Be cautious though, a financially buoyant retail market is a good opportunity to make money.
However, if tenants are leaving as a result of declining sales, there would be cash flow problems. At that point, a new tenant needs to be found. Time, effort and cash is spent on this. Hence, it is important that you research the retail REIT you wish to invest with. Go with REITs that have the strongest anchor tenant possible. These would mostly include grocery and home improvement stores.
These real estate investment firms focus on multifamily rental apartments and manufactured housing. They are prominent in areas where the affordability is low relative to other areas. Here are a few tips for investing in residential REIT’s.
Look for population and job growth. Net inflow of people into a city will be a result a booming economy and job growth. These will result in increased rents. Look for low vacancy rates. As long as demand for apartments in the area continues to rise, a residential REIT will do well. Invest in real estate investment companies with strong balance sheets and good capital.
Healthcare REITs are mostly diversified real estate investment firms. They thrive on the fact that aging is a natural process and the costs of healthcare keep on climbing. Healthcare REITs invest in hospital real estate, health care facilities and retirement homes. These REITs profit through occupancy charges, MediCare and Medicaid reimbursements as well as private payments.
As a byproduct of an aging population, the demand for health care services will increase and so will the demand for or healthcare real estate, which is good news for the healthcare REIT investor. However, an investor should look for the following factors:
- A company with spread risk i.e diversified investments
- Significant healthcare knowledge
- Strong balance sheet and access to capital.
Office REITs invest in office buildings. The key to investing in an office REIT is investing in economic strongholds. A prime office building in Detroit may not do as well as a bunch of average office spaces in Washington DC. Office spaces are usually based on long-term leases. It is important to ask the right questions. Here are four questions you should ask when investing in an office space.
- How high is the unemployment rate?
- What is the average vacancy rate?
- How is the area doing economically?
- How much capital does the real estate investment firm has for acquisition
Mortgage REITs buy mortgages. Well-known examples are Fannie Mae and Freddie Mac, which are government sponsored real estate investing firms. Generally, 10% of REIT investments are in mortgages. These REITs get a significant portion of their capital through secured and unsecured debt offerings. However, they are risky as they are connected to rise or drop in interest rates and can also influence stock prices.
WHAT SHOULD YOU LOOK FOR IN REAL ESTATE INVESTMENT FIRMS?
Look for real estate investment companies that have a record of providing high yields and moderate long term
capital appreciation. Companies that have been in business for a while or at least possess a management team with loads of experience. Great properties and great tenants. To calculate yield; instead of using the payout ratio, which many investors use to assess an REIT, use the funds from operation (FFO). The FFO is the net income less the sale of any property in a given year plus depreciation. Yield can be calculated as dividend per share divided by the FFO per share.
CONS OF REITS
REITs provide a balance between real estate investing and investing stocks. So, they carry risks that are featured in both:
- Falling occupancy rates and high vacancy rates.
- Share prices will drop when property values fall.
- Rising interest rates hurt profit.
- Share prices with mortgage REITs depend on the broader stock market.
- High dividend payouts could force management to take on debts for sustainability.
- Some REIT dividends are taxed as ordinary income. Others benefit from deductions.
TOP 5 HIGH YIELD REITS IN 2016 Going into 2017
REITs derive from a number of real estate investments, as well as mortgage loans. Mortgage REITs (mREITs) are high-risk investments, especially when interest levels rise, because they count on leverage, using borrowed money to improve their returns. Risk-averse traders searching for REITs paying the best dividends while keeping away from mREITS should examine these five:
1. CorEnergy Infrastructure Trust Inc.
CorEnergy Infrastructure Trust Inc. (NYSE: CORR) is a REIT that primarily uses long-term quarterly leases to provide US infrastructure assets it owns available for use by energy companies. These assets include pipelines, collection systems, storage tanks and transmission lines. CorEnergy had a market capitalization of $ 338.2 million as of August 2, 2016. Its share price soared 91.03% during the year. CorEnergy has a profit yield of 10.32%. It has a forward price-earning (P/E) ratio of 20 and a trailing 12-month P/E proportion of 45, contrasted with the business normal of 53. CorEnergy has a trailing 12-month price-sales ratio of five, marginally lower than the industry average of 6.5.
2. Bluerock Residential Development REIT Inc.
Bluerock Residential Development REIT Inc. (NYSE: BRG) retains a diversified profile of local rental apartment properties. The company invests with the best-regarded private owner-operators in America. Bluerock had market capitalization of $258.5 million by Aug. 2, 2016. Its share price advanced 11.47% through the year.
Bluerock has a dividend yield of 8.78%. Although its trailing 12-month price-to-sales percentage of 4.9 is lower than the industry average of 9.5, many of its other fundamentals are weak. They have a high debt/equity ratio of 2.4, twice the industry average of 1.3. Bluerock has a trailing 12-month return on assets (ROA) of negative 1.1%, less than the industry average of 2.5%. Its trailing 12-month return on equity (ROE) is negative 4%, below the industry average of 9.3%. This REIT has a frontward P/E percentage of 27.5, rendering it more expensive than the industry average trailing 12-month P/E ratio of 21.
3. Ashford Hospitality Trust Inc.
Ashford Hospitality Trust Inc. (NYSE: AHT) makes diversified hospitality ventures crosswise over capital structure, hotel property type, market and brand. The organization uses dynamic money related market techniques to screen equity and debt patterns for improving its capital structure. Ashford has a market capitalization of $546.4 million. Its share price declined 9.5% during the year. In spite of the fact that Ashford Hospitality Trust has a profit yield of 8.41%, this REIT has a few negative basics to clarify a share value decrease which has eclipsed its yield. Ashford’s trailing 12-month ROA is negative 1.9%, no place close to the business normal of 3.4%. Its trailing 12-month ROE is negative 10.7%, while the business normal is 7.1%. Nonetheless, at its low, Aug. 2 closing cost of $5.71 per share, this REIT has an appealing forward P/E proportion of 12.3 contrasted with the business average trailing 12-month P/E proportion of 19. It has a trailing 12-month price to sales ratio of 0.4, less than one-fifth the industry average of 2.2.
4. Whitestone REIT
Whitestone REIT (NYSE: WSR) possesses and oversees 69 retail centers in Texas and Arizona. The organization targets shifting customer behavior and purchasing patterns to make a suitable blend of basic supply, specialty retail, eating, well being, money related and entertainment businesses for its properties. Whitestone has a market capitalization of $442 million. Its share cost has taken off 27.72% during the year.
Whitestone has a profit yield of 7.37%. It has a forward P/E proportion of 33.2 and a trailing 12-month P/E proportion of 45.5, instead of the business normal of 51.2. Its trailing 12-month price to sales ratio of 4.3 is much lower than the business normal of 6.3. This REIT has a trailing 12-month ROA of 1.4%, twofold the average of 0.7%. Its trailing 12-month ROE is 4.1%, surpassing the industry average of 3.5%.
5. One Liberty Properties Inc.
One Liberty Properties Inc. (NYSE: OLP) possesses and handles a geographically diverse stock portfolio of retail, office, industrial and other properties under long-term leases. Substantially most of its leases are net leases, with the tenant bearing responsibility for real estate taxes, insurance, ordinary repairs and maintenance. One Liberty has market capitalization of $421.9 million. Its share price has advanced 14.63% through the year.
One Liberty Properties has a dividend yield of 6.59%. Its impressive basic principles add a trailing 12-month online margin of 23.9%, more than the industry average of 11.3%. This REIT has a trailing 12-month ROA of 2.5%, triple the industry average of 0.7%. Its trailing 12-month ROE of 6.2% dwarfs the industry average of 3.5%. One Liberty’s forward price-earnings (P/E) ratio of 23.4 and trailing 12-month P/E proportion of 26.7 are significantly below the industry average of 51.2.
In essence, real estate investment companies are not like other companies and some research will go a long way in ensuring you make profit with any type of real estate investing firm you choose.