• Home
  • About
  • Advertise
  • Contact
  • Policy
  • Guest Post
  • Archive

One Cent At A Time

A Personal finance blog to get rich

  • Email
  • Facebook
  • Pinterest
  • RSS
  • Twitter
  • Beautiful Life
  • Becoming Rich
  • Beginners Guide
  • Extra Income
  • Productivity
  • Saving Money

The “Short” Journey to Going Long in Real Estate Investment Trusts

April 24, 2013 8 Comments

Share this:

  • Tweet
  • Email

The housing market is in recovery, a slow and painful one, but a recovery nonetheless. And no, I’m not saying this because I’ve been obsessing over house prices, builder confidence indexes, construction permits numbers and foreclosure rates (ok, I’ve done that too), but because the hedge funds, where the smart money lies, are moving back into real estate. And I’m trailing behind.

REIT Investment

I decided to get into real estate investing about four months ago – right around Christmas when the budgets and the belts are too tight to really be thinking about investments. Well, I’ve never had a deep pocket anyway so I decided to jump in with whatever I could scoop together and hope for the best.

My research took me into the real estate investment trusts territory – a nifty vehicle that allows small investors like me to invest in large-scale, income-producing real estate. But first I had to do some research.

REITs?

The US Congress passed the Real Estate Investment Trust Act in 1960 and three years later, the first REIT was formed. REITs could be either publicly traded on a stock exchange or non-traded – you can invest in both types with small exceptions.

As of January 1, 2012, there were 166 publicly traded REITs registered with the Securities and Exchange Commission and about 1,100 non traded REITs that have filed tax returns with the IRS. Apart from public and non-public, REITs can also be equity, mortgage or hybrid REITs. Equity REITs, the most common type, own and operate income-producing real estate.

Mortgage REITs provide funds to real estate owners either directly in the form of real estate loans, or indirectly through buying mortgage backed securities (No mortgage protection needed as this is indirect real-estate investing). Finally, hybrid REITs use the investment strategies of both equity and mortgage REITs.

Are REITs The Right Investment For You?

The first question you need to ask yourself before you jump into REIT investing is what you are looking to get out of it. REITs are an appropriate investment for both large and small investors who have a preference for current income and would like to add exposure to the real estate market to their portfolio.

REITs however are not suitable for those investors looking for capital appreciation – REITs distribute 90 to 100 percent of their pre-tax earnings to shareholders through dividends but the value of their shares tends to change very little.

REITs are also not for you if you want to minimize your taxes – the dividends you will receive are added to your total taxable income so you will owe more taxes at the end of the year.

How to Choose Your REIT

Professional investment managers usually have to screen hundreds of REITs in all their forms – public traded and non-traded, private, mutual funds and ETFs – to find the one tailored to the needs of their clients. What’s more is that traditional metrics like price-to earnings multiple, earnings-per-share ratio and growth are not too helpful in the valuation of a REIT.

But there are a couple of quick and useful tips I can give you on what to look at when trying to evaluate a REIT:

Quantitative Metrics

Capitalization Rate – Cap Rate is the expected net annual operating income for a given property, divided by the purchase price of that property. For example, if a firm pays $100 million for a building with annual operating income of $10 million, the cap rate for that building is 10%.

The metric is used to determine how effectively the REIT’s assets are generating cash flows. REITs usually first pick a Cap Rate for their acquisitions and then calculate how much they are willing to pay for the property based on their estimate of the operating income the building will generate.

Net Asset Value – NAV is the adjusted asset value of the properties held by the REIT. It is usually quoted “per share”, which means the value is divided by the number of total outstanding shares.

Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) – FFO is a measure of the cash flow generated by the REIT. It is calculated by adding up net income, depreciation and amortization and subtracting gains on sales of property. REITs typically disclose their FFOs in the footnotes of their financial statements and are required to show their calculations.

Some investment professionals go a step further and calculate the AFFO, which is generally equal to the REIT’s FFO with adjustments made for recurring capital expenditures used to maintain the quality of the REIT’s assets as well as rent increases.

Qualitative Metric

Management – When investing in a REIT one should always consider the managers’ qualifications, experience and track record. REITs can be “internally managed” with management employed directly by the REIT, or “externally managed” pursuant to a management contract with no direct employees.

Private REITs and registered but non-traded REITs are usually externally managed on a for-fee basis by a party manager. Publicly traded REITs can be either internally or externally managed but as a general rule, once they reach a certain size, most public REITs will “internalize” their management through an exchange of stock with the owners of the advisor.

Internalization is considered to better align management and the shareholders by limiting the enterprise value growth going solely to the management.

Goals – Some REITs might prefer to have more cash on hand, while others might be looking at aggressive acquisitions. Furthermore if it’s a non-traded REIT it’s important to learn what its exit strategy is.

In most cases the REIT will provide investors with a liquidity event by either listing on a public exchange or by selling the assets in the portfolio and distributing the net liquidation proceeds to investors.

Kind of Assets Held – Last but not least, one should always consider in what kind of assets the REIT is investing. REITs can invest in a variety of property types: shopping centers, apartments, health care facilities, office buildings, hotels, warehouses and others.

Some REITs prefer to specialize in one sector such as timberlands or data centers, while others diversify with many different types of buildings.  REITs can also choose whether to invest in real estate located in a single city, a state, across the country or even abroad.

The Investment

After carefully considering the pros and cons of REIT investing, I decided to go ahead and invest into a REIT ETF. My pick was the SPDR Dow Jones REIT ETF – an exchange traded fund which tries to invest in companies whose charters are the equity ownership and operation of commercial real estate.

The ETF is tracking the performance of the Dow Jones U.S. Select REIT Index and is aiming to invest at least 95 percent of its total assets in the securities comprising the index. The fund holds 85 securities in total with 47.98 percent of the assets going to the top 10 holdings.

It has over $2.1 billion in assets under management and charges investors 25 basis points a year in fees for its services.

I bought about 300 units of the ETF on January 4 when it was trading for about $73 apiece, which placed my initial investment at $21,900. The ETF closed at $80.24 on Thursday, April 18, and if I exited my position back then I would have pocketed a nice return of $2172 or $2295 with the dividends.

I’m still holding on to the ETF units as I’m sure there is still plenty of upside potential. The REITs included in the ETF have posted strong earnings over the past three-quarters and some have boosted dividends.

The Bottom Line

REITs are a great way to get exposure to a diversified portfolio of real estate assets and often enjoy an attractive dividend yield. As any other financial asset, they do carry a certain risk so I advise to always turn to an investment professional for advice before jumping into a REIT investment.

About author Anton Aleksandrov – Anton is an economist freshly graduated from the United States who is interested in real estate investment opportunities. He is one of the more recent additions to the iNVEZZ  journalist team and his area of expertise is real estate investment trusts.

LIKE THIS POST?
Thank you for subscribing.
Something went wrong.
I agree to have my personal information transfered to MailChimp ( more information )
Join our community of 8000+ subscribers to increase your net worth and build wealth
We hate spam. Your email address will not be sold or shared with anyone else.

Share this:

  • Tweet
  • Email
The tool that changed the way I manage my personal finance - Personal Capital, The Best Free Personal Finance Tool

Want to start a WordPress blog now? The onecentatatime.com blog is hosted by Siteground Web Hosting. For only $3.95 a month, Siteground can help you set up and host your website/blog quickly and easily.

About the Blogger Hi I am SB, a personal finance enthusiast with a career in software development. I am an immigrant to the USA since 2005, after being born and brought up in India. This 40 something technocrat lives and breathes personal finance whenever he gets time from the day job, job as a husband and a dad

Some links on this page may be affiliate links, if you make a purchase following the links, I may earn a commission. Read affiliate disclosure here
« Retirement Saving for Poor and Minimum Wage Earner
All About Car Tires and How it Relates to your Money »

Comments

  1. Jenny @ Frugal Guru Guide says

    April 24, 2013 at 12:25 PM

    Aren’t REITs trading at a VERY high valuation at the moment? I’d rather stick to actual real estate–it doesn’t seem as overpriced.

    Reply
  2. [email protected] says

    April 24, 2013 at 5:04 PM

    There are some very interesting calculators of net asset value out there (I’ve even seen decent apps). Great information here.

    Reply
    • Anton says

      April 25, 2013 at 1:33 AM

      Thanks Mike! I haven’t looked into them but I imagine they’d be helpful as calculating NAV could be so tedious and subjective.

      Reply
  3. Ryan says

    April 25, 2013 at 3:10 PM

    Thanks for the article. Hadn’t heard of REITs before. Will definitely be considering them for my investments. How many ETF’s are there on them?

    Reply
    • Anton says

      April 26, 2013 at 4:12 AM

      According to what I read there were about 22 REIT ETFs as of 28th February.

      Reply
  4. Funny about Money says

    April 29, 2013 at 11:01 PM

    Back in the Dark Ages when I had TIAA-CREF through my former employer, I got really frustrated at how poorly my 403(b) investments were performing at the time. At one point I moved a bunch of funds into an REIT. Interestingly, it did outperform the other funds.

    That was some years ago. Fortunately, I had moved out of TIAA-CREF and over to Fidelity, thereby closing out the REIT, before the late, great real estate bubble burst.

    Reply
    • SB says

      April 30, 2013 at 9:26 PM

      REITs might get the favor once again till the mortgage rates are keeping low.

      Reply
  5. Making Money Online says

    July 18, 2013 at 7:45 AM

    Thanks! Great Post!

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.



Create your own blog in 20 minutes and $20

Personal Capital, a free tool to change your financial health today

I use and suggest Upstart, for your personal loan need

CreditKarma, a free tool to check your credit scorey

I use Coinbase, for my crypto investments

101 Cents at a Time

101 Ways to Earn Extra Money on the Side
201 Frugal and Perfect Birthday Gifts
101 Ways to Save Money Everyday
101 Ways to be Better and Successful at Work
101 Ways to Save Environment and Energy
101 Frugal and Romantic Anniversary Ideas
101 Low-Cost Men's Fashion Ideas
101 Personal Finance Tips
101 Ways to Reuse Household Stuff
101 Things to Do, When Nothing to Do
101 College Graduation Gift Ideas
100 Tips for Ecommerce Startup
101 Ways to Enjoy Indoor During Winter
101 Ways to Beat Procrastination

Popular Posts

Quick Cash - How to make $100 legally, in a day
Living well on less than $15,000 a Year
Top survey sites for side income
What to do when auto repair goes wrong
Where should I invest my money now?
20 Ways to be productive and happy at work
51 Ways to get out of debt
Be a better person in 15 days, 15 ways
Income ideas for retirees and senior citizens
51 side jobs for college students
Urgently need a large amount of money?
Should I buy or should I rent?
Best Personal loan providers
25 Ways to save environment
25 DIY car repairs to save money
How to decorate office cubicle
How to show your wife you care
50 Financial Rules for Success
51 Frugal weekend family activity ideas
Become Rich By Saving 1 Hour Of Daily Wage
How much do I need to save for retirement?
How to negotiate your salary

Follow us on FaceBook

About Author

SB

Blogger by choice and IT manager by profession. Finance is my passion and gardening is my greatest satisfaction. Born in India, settled in US, Husband and a father. I created this blog in 2011 with a vision to help others. Thanks for your patronage. More info on my "about" page.

View all posts


Subscribe

Join our community of 5000+ subscribers to increase net worth and build wealth

Advertisements

Personal Stories

How I got a new HP computer replaced
Was COVID circulating in USA in fall of 2019?
How my credit score went up 800+
Why I didn’t invest in Bitcoins
How I controlled impulses to buy things
Why this blog is named One Cent at a Time

Subscribe via Email

Site Disclaimer

Disclosure of Material Connection: Some of the links in this web site are “affiliate links.” This means if you click on the link and purchase the item, I will receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”
Read full Affiliate disclosure


One Cent at a Time is published by SB. The opinions expressed herein by him are his own and not those of his employer or anyone else. All content on One Cent at a Time is for entertainment purposes only. By reading this blog, you agree that SB and/or One Cent at a Time is not responsible for any actions taken after reading this blog. For the full disclaimer, click here .

Major Media Mention

One Cent at a Time Media Appearances

Copyright © 2023 One Cent At A Time · Designed by Nuts and Bolts Media