What defines a good REIT?
Defines of a Good REIT
“Well, real estate is always good, as far as I am concerned. ” -Donald Trump
A real estate investment trust, or even REIT, is a company that sells real estate but allows the general public and individual investors to buy shares. REITs are just like every other stock option which represents a company. However, there are two defining features of investment trusts which make it a great investment opportunity. The first feature is it’s only business is coordinating and monitoring property investments. The second feature is that it has to hand out its profits as dividends.
The reason why real estate investment trusts are so popular is that getting the REIT status means that corporate tax is not applied towards the business. When non REIT companies make a profit they must pay taxes first after which disturb what is left. However, real estate investment trusts do not get taxed and therefore can distribute all the profits made as dividends to their investors. If you have a large principle which you’ll invest, real estate investment trusts may be a great option for you personally. If you are interested in REITs contact a financial advisor who are able to point you in the right direction and offer advice how to pick the perfect REIT for you.
REITs are great if you are looking at making an income and living off your investments. REITs possess a similar status of high yield bonds in profit producing energy and rate of return. Remember, both REITs and high yield investments are high risk and that’s why they can be, if all goes well, extremely profitable. Investment trusts can be affects by th same factors which influence the stock exchange and the economy. These may include supply and demand, rates of interest, inflation, and deflation. A rise in interest rates is a great indicator of a slowly growing economy. This is great for individuals invested in REITs because it means that businesses are growing and seeking to rent or buy more space. The same is true along with residential housing. When the economy is doing well people are interested homes, apartments, and condos.
REITs are companies that reap the advantages of no corporate tax by managing real estate properties and paying out nearly all their profits in dividends. Dividends can offer an extremely large and stable income which may be much more then the returns from Treasury options or actually small cap stocks.
Finding Good Investments Within Stock Market
Finding good investments in the stock market is simple in a bull market when stock prices are rising. Not so in the center of a bear market… until, that is, the stock market has really been crushed as with early 2009. Then it’s time to look for investment possibilities. Here’s a guide to making your search for good opportunities easier.
When looking for good investments in the stock market focus on industries rather than on individual stocks. Stocks in the same industry often move together as a group, but every industry has its winners and it is losers. Be wary of any stock that under performs it’s peer group.
Look at it this way. A company in a industry can go broke; but a major industry tends to recover eventually.
In a bear market investors tend to sell stocks indiscriminately, throwing out the infant with the bath water. When a bull market takes hold the cream tends to popularity. Why stress over stock selection when you can find investment opportunities the simple way?
Consider stocks in the commercial real estate business within early 2009, like equity real estate investment trusts (REITS). These businesses (REITS) invest in office buildings, shopping malls, apartment complexes and so forth. Up until 2007, they and their shareholders had been on the roll for years. Investors benefited from rising stock prices as well as nice dividends.
Then commercial real estate got hit hard and real estate investors had a few real bad years. Now, in this scenario ask yourself this particular question. In your search for good investments, would you rather bet on some property company you know little about… or would you rather bet how the real estate industry in general will recover?
The more specific you receive in looking for investment opportunities, the more risk you consume the stock market.
Would you rather try to pick the very best REIT, or would you settle on just owning a small a part of a large portfolio of real estate stocks? If you find the latter, here’s how to take advantage of investment opportunities in property or any major industry.
Some of the major mutual fund companies offer specialty funds that focus on industries or sectors like real estate. You simply invest within the fund and they look for the good investments, make the actual stock picks, and manage the portfolio.
You don’t need to play the stock exchange to make money in stocks. You just need to be committed to the right economic sector or industry at the right period. In other words, your list of potential investment opportunities has just been shortened to some dozen or so industries groups vs. 5000 or so person stocks.
Finding good investments in the stock market isn’t as difficult as it might seem… if you simplify things and don’t get too particular.
Real-Estate Trading: Investing in REITs
Real-estate may provide investors with a high-yield and low risk investment combination for greater total return potential to some diversified long-term portfolio. For most people, investing in real estate begins and ends using the purchase of a home and any prospects of investing within office buildings, hotels, and shopping centers seems nearly impossible. Nevertheless, these investments are more attainable than you may think thanks to investment trusts (REITs).
A REITs sole purpose is to purchase groups of professionally managed properties such as office buildings, condo complexes, medical complexes, industrial buildings, and so on. REIT performance has varied through the years, but the total annual return for the past 10 years may be 10. 5%.
REITs trade like close-end mutual funds. There really are a fixed number of shares outstanding and they offer those shares using a price per share model similar to close-end mutual funds. Nevertheless, unlike close-end mutual funds, REITs gauge performance under different metrics. Instead of measuring performance by net asset value, REITs use a device called funds from operations. Fund from operations is defined as net gain plus depreciations and amortization, excluding gains or losses from financial debt restructurings and sales of properties. A REITs growth benchmark is really a byproduct of funds of operations growth.
Appeal of REITs
REITs offer a range of advantages to investors, including:
Diversification – Investors turn to REITs and their good dividend paying possibility of diversification against future market downturns because REITs are uncorrelated along with equity markets.
Built-in management – Each REIT and its property investments are overseen using their own management team, saving investors tremendous time from researching every property’s management team.
Tax advantages – REITs don’t pay federal corporate taxes and are required by law to distribute at least 90% of the annual taxable income as dividends, eliminating double taxation of earnings. Investors can also have a portion of REIT dividend income be treated like a return of capital.
Inflation protection – Since landlords are inclined to boost rents more quickly when inflation picks up, equity REITs – which obtain most of their income from rents – is definitely an inflation hedge.
Weighing out some risks
Just like all opportunities, REITs carry with them specific risks that you should consider and consult with your financial advisor before adding them to your portfolio. Above all is the possible lack of industry diversification because all REIT investments include only property opportunities. Some REITs may be even less diversified when they decide to specialize in specific property developments such as medical buildings, or even golf courses. Because of their focus, a REIT investment should be used included in a diversified portfolio to provide greater diversification.
You should also remember that REITs are subject to changes in the value of their own underlying portfolios, and their prices may fluctuate with changes within their real estate holdings. REITs are also interest-rate sensitive – especially mortgage REITs. If rates and borrowing costs rise, construction projects with marginal funding might be shelved, potentially driving down prices across the REIT industry.
There are several unique factors to consider when selecting a REIT
Yield as well as debt – High-yields are tempting, but REIT yields above certain levels may imply that there’s not enough being reinvested for acquisitions, which could impact long-term growth. Too much debt or leverage can also impact prospects for growth. Your Isakov Planning Group Financial Advisor will help you define what a high REIT yield and a high debt load might be in a given market scenario.
Management potential – Management must have a substantial personal stake in the REIT, which should be listed within the latest proxy statement. If the REIT is new, refer towards the prospectus for the management’s track record (if any) within similar enterprises. For insight into management’s effectiveness at cutting expenses and increasing rents and occupancy, refer to same-space revenue growth within the annual report’s financial analysis.
Demographic trends – In the situation of apartment REITs, for example, ask about the area’s path of vacancy rates and rents, the amount of new condo construction, and the affordability of home ownership. The higher the price of home ownership, the more attractive an apartment REIT might end up being.
Perhaps investing in a REIT mutual fund is one method to manage risks or real estate investing, and to spare investors from investing time into researching all the avenues that needs to be carefully considered when investing in a diversified real estate portfolio by themselves. A real estate mutual fund may invest in several different properties across different sectors from the real estate industry in several different geographic regions, giving you diversification and a method to manage your risks.