Good commercial REITs
Commercial Property Makes a Good Investment
REITs allow like-minded investors to collaborate to be able to aggregate assets, and are one of the reasons why real estate itself has turned out to be regarded as a fourth class of asset (the additional three are stocks, bonds and cash). Commercial real estate is a main focus of this sort of investment.
Although REITs have consistently outperformed many other investment vehicles in the last decade, it pays to be cautious before making an expense. Some REITs are publicly traded, and therefore face significant risk about the stock market. On the other hand, private REITs are not subjected to daily price fluctuations outside of their control, and instead can focus all their efforts on increasing profitability by improving the offering of the home itself.
In Canada, these trusts typical allow investors to pool their funds to handle and buy bricks and mortar assets such as residential, commercial, or commercial real estate. Compared to many other investments, this particular investment in actual, physical properties means that there is significantly a smaller amount risk. The “one vehicle for all” model of a private syndicate implies that when investors pool their resources they can diversify their assets and when again reduce risk.
Properties are usually diversified according to area, type, and how they are used. Revenue comes from housing costs for these leased properties, as well as value-added services. A key characteristic of a REIT management team is constant attention to improving the value and then the profitability of the lease space, as well as the capability to sign tenants for long leases, which also reduce the risk of the investment. A prime example of this in a real estate investing Canada context may be the recent purchase of Zellers by an American investor. Zellers retains many attractive long-term leases at many properties across Canada. While this made Zellers a perfect target for a foreign purchaser, the REITs that manage the properties benefited from the major tenant locked into a longterm relationship. The investors, obviously, are the ones who benefited in the end.
How to purchase Commercial Real Estate With REITs
For the average small property investor, outright ownership of an office building, a local shopping mall, a warehouse, or even an apartment complex is a dream which will go unrealized.
However, there is an investment vehicle that does allow smaller investors to participate available marketplace by buying an interest in those property types, with no hassle of daily management responsibilities, while providing great potential for any passive income.
Those vehicles are known as real estate expense trusts (or REITs). Created by Congress in 1960, REITs allow anyone to invest in a number of commercial real estate, depending on the type of property a specific REIT specializes in.
“While the Internet has made it easier for investors to locate and buy commercial real estate, these transactions are still more complicated and certainly more expensive than a typical residential property buy, ” says Rick Sharga, executive vice president at Auction.com, an online real estate marketplace.
“Real estate investment trusts can be a viable option for investors who’d like to diversify their portfolios with the addition of commercial real estate, but aren’t comfortable with the complexity or can’t satisfy the capital requirements that buying commercial properties involve, ” he states.
From hotels to apartments to assisted living facilities, office structures, industrial space, retail space and more worldwide, REITs are mandated legally to be widely held and to distribute most of their own income as dividends to shareholders. And because investors can purchase shares about the stock market, REITs are considered to be a very fluid asset.
“REITs provide mom-and-pop investors with instant liquidity. By owning REITs they are able to enter and exit on a daily basis, ” says Samuel Sahn, a portfolio manager within the New York office of Timbercreek Asset Management, who currently handles $800 million in REIT stocks.
Additionally, Sahn says REITs really are a good risk mitigator that provides diversification to a household’s profile.
“Mom-and-pop investors have the ability to purchase REITs. It provides them with real estate exposure they can’t get by themselves, plus access to the best assets in the world, inch he says. “It’s tough to buy a storage unit or perhaps a hotel along with having the expertise and time to handle those assets. ”
Equity versus mortgage REITs. According to the National Association of Investment Trusts (NAREIT), 90 percent of all market capitalization within the REIT industry is focused on equity REITs. Their business model is that of the real estate company that buys specific types of commercial qualities. Investors’ capital gets pooled together and then the REIT’s management team purchases the kind of properties the REIT specializes in.
After expenses are paid, the majority of the REIT’s annual income is distributed to investors/shareholders as returns. Any capital appreciation from the sale of properties is also distributed within the dividends.
On the other side are mortgage REITs. In this particular scenario, investors are putting their money into the debt financing side from the business. The business model for mortgage REITs is to purchase real estate mortgages (mostly single-family home loans) or even mortgage-backed securities. Investors in turn earn income from the interest paid on those investments and also the sale of mortgages.
Long-term returns. Whether the investor chooses to go with equity REITs or mortgage REITs is an individual decision that needs to be based on the investor’s long-term investment goals and strategy.
Unlike the quick double-digit rates of return veteran investors are familiar with as either owners of rental units or as flippers, buying shares of REITs is really a more conservative play that has the proven potential for a far more sustainable rate of return, albeit over a long period of your time.
According to data compiled by NAREIT, over the past 25 years equity REITs located in the U. S. have outperformed the Standard & Poor’s 500 index when it comes to income and total returns combined.
“Looking at the current dividend yield isn’t enough, ” said Brad Case, senior vice president of investigation and industry information for NAREIT. “You want something that provides you with a strong dividend yield and appreciation in value. It must be supported by a long track record. ”
NAREIT data implies that listed equity REITs had an average total return of 12. 14 percent per year going back 20 years without the reinvestment of dividends, while reinvesting dividends yielded a typical total return of 17. 60 percent per year.
Long-term yields are key point, particularly for investors who are looking for a stable income stream to assure they have funds when they will be ready to retire.
“As an investor, you should be looking for investments that will settle the debts and also grow your wealth so you’re not running from money, ” Case says. “That’s one of the greatest things most retirees come to mind about. ”
Economic factors are important to valuation. Like every other investment vehicle, the value of REITs – and their roi – are tied in large part to economic factors for example interest rates (which are of particular concern to traders in mortgage REITs), unemployment, inflation and many others.
Although he can’t predict whether REITs will still outperform the stock market over any particular time period, Case notes how the average real estate cycle is much longer than the average stock exchange cycle (18 years for real estate versus four years for that stock market).
Given those numbers, Case believes that the current housing market cycle is a bull market that is not even halfway along and it has several years of strong returns to go. So while the nation’s overall economy does have an effect on the market for REITs, Case recommends that investors have a well-diversified exposure to the real estate cycle and that REITs take part in every portfolio.
“My basic recommendation is that you should also have a significant piece of your portfolio in REITs. It you do not currently have it, there’s no reason to think it’s a poor time, ” he says. “I can’t tell you that the returns between now and also the end of the year will be good, but I can say that within the next eight years it is more likely to be good compared to bad. ” Plus the investor can start off small because lots of REITs have no minimum buy-in, Case says.
While there tend to be some global markets performing well, Sahn believes the U. Utes. has the strongest economic fundamentals to support today’s REIT marketplace, which will translate into the strongest earnings growth of the developed markets in the world.
Options for selecting REITs. For investors who prefer to be actively involved in selecting assets and managing their personal portfolio, there is nothing stopping them from selecting and buying shares of REITs individually via a stock broker, financial advisor or financial planner.
Whether their interest is based on storage units, retail malls, multi-family apartments, or any other kind of commercial property, for investors who understand where they are placing their money, REITs offer an opportunity to actively manage the diverse portfolio.
However, for those who are not so assured in selecting particular REITs or property types, there is the possibility to buy as many or as few shares as they need through either a mutual fund or an exchange-traded fund, for example those available through Vanguard, Fidelity or JPMorgan Chase & Company., along with many other providers.
Then there are actively managed funds that research the REIT market and make an effort to build portfolios of REITs that will outperform the market, Sahn states.
“They pick the market and the property type based on where they find a very good underlying fundamentals, ” he says. “You can have the exact same property type, but depending on the geographic location you might have different fundamentals. ”
No matter which way an investor decides to go with regards to choosing REITs for investment potential, as always it is good to obtain a financial advisor involved to address any concerns before putting in the money.