The Keys To Assessing Any Reit
There are a few things to keep in mind when assessing any REIT. They include the following:
According to the Securities and Exchange Commission, a REIT must invest at least 75% of its assets in real estate and cash, and obtain at least 75% of gross income from sources such as rent and mortgage interest.
Reit Vs Real Estate Fund
Theres a common misconception in the passive income community regarding syndicated real estate investments, so lets be clear: a real estate investment trust and a real estate fund are not the same thing. When real estate sponsors purchase real estate, then establish a corporation with the purpose of offering income-producing opportunities to investors, its called a REIT. Interested investors then buy and sell shares of this corporation like a traditional stock.A private real estate fund is a pool of investment properties purchased by a real estate equity group or firm. Investors contribute capital for the purchase offered by these private or public real estate companies. Real estate funds have typically invested in REITs and real estate-related stocks. These funds have employees who manage the purchasing, maintenance, and ultimate selling of the properties, while the income generated is distributed to the shareholders as dividends.Both REITs and real estate funds pay out regular dividends. However, unlike a real estate investment trust that is subject to market fluctuations, real estate funds provide added value through appreciation. And funds are historically available only to accredited, high-net-worth investors and typically require a large minimum investment.Much of the confusion of a REIT vs. Real Estate Fund likely occurs from the different types of real estate funds.
Cons Of Ereit Investing
Liquidity is a concern for prospective eREIT investors. With publicly-traded REITs, you can sell your shares at any time for full market value with the simple click of a mouse. Meanwhile, Fundrise’s investment products only have monthly redemption options, and there are limitations that may prevent shares from being redeemed.
Each eREIT typically has a minimum investment amount of $1,000. While this is often superior to non-traded REITs, it’s important to mention that publicly-traded REITs can be bought for as little as the price of one share.
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One of the most common questions I get from aspiring real estate investors is whether to buy property directly or purchase shares in a real estate investment trust, commonly referred to as a REIT.
For those who arent familiar with REITs, these vehicles allow individuals to buy shares in companies that own real estate as their primary business activity. While some REITs are private or non-traded, in this article well focus on the publicly-traded REITs, which are the most visible and can be purchased by any investor with a brokerage account.
While both methods of investment allow investors to achieve real estate exposure, its a bit like comparing apples and oranges. One represents direct ownership, while the other is characterized by owning shares in a company whose sole purpose is to own and operate a portfolio of real estate assets. I own shares in several REITs as part of my personal equity portfolio, as well as some real estate directly. I view both of those investments differently and see the advantages and disadvantages of each.
To help you better understand the appeal of investing in brick and mortar real estate versus a publicly-traded REIT, here is a list of considerations.
For reference, I own shares of XRE and VRE in the Canadian market. I also own a few International REITs
Reits To Buy If You Think Housing Is In A Bubble
Smart real estate investors would rather invest in REITs than buy properties when the housing market is in a bubble.
Industry observers think Canadas housing market is in a bubble. While no one can show tangible proof or confirm its true, there are indicators. UBSs most recent Real Estate Bubble Index shows the select cities in the world with high bubble risk scores. Toronto and Vancouver are in the top 10 list in 2021.
Toronto ranks second after Frankfurt in Germany. According to reports, almost 30% of buyers this year own multiple properties. It only indicates that real estate investment in Canada is alive and piping hot amid the pandemic. Despite efforts by the federal government to cool down the situation, the upward trend continues.
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Two Very Important Metrics For Real Estate Investors To Know
To be perfectly clear, there are certainly more than two metrics that REIT investors should use, and you can read our more thorough list of important REIT metrics if you plan to analyze and evaluate individual REITs.
However, the two most important metrics to know are funds from operations and company-specific varieties of that same metric.
Funds from operations, or FFO, expresses a companys profits in a way that makes more sense for REITs than traditional metrics like net income” or “earnings per share.” Without getting too deep into a discussion of how depreciation works, lets just say that when you invest in real estate, you can write off a certain portion of the purchase price each year. Although this decreases taxable income, it also distorts a REITs profits — after all, depreciation doesnt actually cost the REIT anything. FFO adds back in this depreciation expense, makes a few other adjustments, and creates a real-estate-friendly expression of a companys profits.
Some Common Risks Of Investing In Private Reits
Lack of liquidity
Since private REITs are not publicly-traded, they may be difficult to value and cannot easily be resold. You may have to hold onto your investment for longer than you might have planned.
Lack of transparency
Since private REITs are not subject to the same disclosure obligations as public REITs, there is less information available on how the REIT is performing, which may make it more difficult for you to determine how your investment is doing.
The payouts you receive and the value of your investment is affected by the value of the properties that the private REIT has invested in and the income they provide. Deteriorating conditions of the properties, higher vacancy rates or tenants that do not make their rent payments can negatively affect your payouts or the value of your investment.
High fees
Private REITs sometimes pay higher management and other fees that can reduce its payouts and leave it with less money to maintain existing properties or invest in new ones.
Personal liability
You could be held personally liable for paying the obligations of a private REIT if the REIT does not have the funds to cover its costs. This is known as a capital call.
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Types Of Real Estate Investments
Real estate is divided into several broad categories, including residential property, commercial property and industrial property.
Real estate in most countries are not as organized or efficient as markets for other, more liquid investment instruments. Individual properties are unique to themselves and not directly interchangeable, which makes evaluating investments less certain. Unlike other investments, real estate is fixed in a specific location and derives much of its value from that location. Industrial real estate With residential real estate, the perceived safety of a neighbourhood and the number of services or amenities nearby can increase the value of a property. For this reason, the economic and social situation in an area is often a major factor in determining the value of its real estate.
Numerous national and international real estate appraisal associations exist for the purpose of standardizing property valuation. Some of the larger of these include the Appraisal Institute, the Royal Institution of Chartered Surveyors and the International Valuation Standards Council.
Investment properties are often purchased from a variety of sources, including market listings, real estate agents or brokers, banks, government entities such as Fannie Mae, public auctions, sales by owners, and real estate investment trusts.
Alternatives To Real Estate Investing
Real estate investing is just one option if you want to build wealth. Securities like stocks and bonds offer a much more liquid place to stash and grow your money and dont tend to rise or fall with the housing market. And dont worry: You no longer have to be an expert at understanding p/e ratios or spend time pouring over annual financial statements. Automated investing takes out all the hassle and the guesswork.
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This article is provided for informational purposes only. It does not cover every aspect of the topic it addresses. The content is not intended to be investment advice, tax, legal or any other kind of professional advice. Before taking any action based on this information you should consult a professional. This will ensure that your individual circumstances have been considered properly and that action is taken on the latest available information. We do not endorse any third parties referenced within the article. When you invest, your money is at risk and it is possible that you may lose some or all of your investment. Past performance is not a guarantee of future results. Historical returns, hypothetical returns, expected returns and images included in this content are for illustrative purposes only.
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Buying A Rental Property Vs Reits: Assessing Which Is A Better Investment
- REITs are real estate investments just like rental properties.
- Both have unique pros and cons that we will explore in this article.
- We compare risks, income, total returns, taxation and other considerations.
- Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our model portfolio. Get started today »
Most real estate investors do not trust stocks. Similarly, most stock investors never invest in real estate. Being a hybrid of both, has made it difficult for investors to invest in REITs .
Still to this day, it is difficult to find good comparisons between REITs and real estate and it has led to many misconceptions.
I have myself worked on both sides of the fence, first as an analyst for a +$150 million private equity real estate investment firm and later as a professional REIT analyst. I have invested a considerable portion of my net worth in both for years and believe to understand the pros and cons of both approaches. It is not an “either/or” type of question and the best approach to pick is mostly a question of:
- Personal preferences
- Expertise and access to resources
- Risk tolerance
- Return objectives
- Current valuations
In this article, we provide an objective comparison between REITs and Rental properties to help you decide which is best for you.
We break down this comparison to the following five topics:
Reits Are Fairly Accessible To Those Who Want To Invest In Them
If you want to invest in publicly traded REITs, you can do so through any brokerage account, like Fidelity or TD Ameritrade. For non-traded REITs, though, you’ll usually need to work with an individual broker or a financial advisor to get invested, but apps like Fundrise, YieldStreet and Elevate Money also allow you to invest in non-traded REIT’s on your own through their platforms.
They each have their own strategy Elevate Money, for example, invests in car washes, gas stations, dollar and convenience stores and quick service restaurants while YieldStreet typically has portfolios made up of commercial, residential and multi-purpose properties. Also, some robo-advisor platforms like SoFi Invest work REITs into their automated investing strategy for users.
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Closing Notes: Reits And Rentals Are Wonderful If You Know What You Are Doing
I have been investing REITs and real estate for a long time and greatly profited from the sector. Today, I am strongly convinced that most investors should invest in real estate with REITs to avoid the managerial complications of owning rentals.
That said, you need to know what you are doing. A lot of individual investors earn very poor returns investing in liquid assets because they trade too much. To demonstrate this, consider that the average investor generated only 2.6% annual returns over the past 20 years:
Clearly, most investors do not know what they are doing. By simply holding a REIT ETF, investors could have earned up to 12.5% annual returns and outperformed almost all other asset classes:
Investment Properties Vs Reits: Which Is The Better Investment Strategy
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Two Millionacres pros, Liz Brumer and Matt Dilallo, tackle both sides of this investment debate.
Owning investment property to help build wealth has been practiced since ancient times and for good reason — real estate has the potential to appreciate, provides tax breaks, and typically has multiple uses or options for generating income. But owning and managing investment properties isn’t the only way to invest. If you’re looking to invest in real estate, you may be wondering whether you should purchase investment properties or a real estate investment trust . While everyone’s situation and investing goals are unique, there are some distinct advantages and disadvantages to both methods of investing.
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Some Common Risks Of Investing In Real Estate Lps
Lack of liquidity
Real estate LPs that develop property typically require long-term investments that may be held for the entire duration of the project, which can run into construction delays and cost overruns that significantly extend the project timeline. You may not be able to resell your investment when you want, if at all.
No guarantee
Since the real estate market can rise and fall, and development costs can go over budget, there is no guarantee that a project you invest in will be sold at a profit.
Operational risks
The success of a real estate LP is entirely dependent on the management abilities of the general partners that are operating the partnership. As an investor, your role is passive and limited to the investment you have made, with no active role or responsibilities in the business of the partnership.
The real estate market can rise and fall, and development costs can go over budget.
Lack of diversification
Some real estate LPs develops one project at a time. If the project is never completed or sold, you could lose some or all of your investment.
Government approvals and market value
Some real estate LPs may not have secured all of the required government permits and zoning approvals needed to develop the land they own. Delays or denials for permits and approvals can significantly delay a project and impact the value of your investment.
Risk of capital call
If a project goes over budget, you could be obligated to invest more money to cover the extra costs.
What Are The Different Types Of Reits
- Equity REITs The majority of REITs are publicly traded equity REITs. Equity REITs own or operate income-producing real estate. The market and Nareit often refer to equity REITs simply as REITs.
- mREITs mREITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments.
- Public Non-listed REITs Public, non-listed REITs are registered with the SEC but do not trade on national stock exchanges.
- Private REITs Private REITs are offerings that are exempt from SEC registration and whose shares do not trade on national stock exchanges.
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What Are Reits And How Do They Work
REITs offer a more affordable alternative to those who wish to gain exposure to the property market without actually buying property.
They are companies that own and operate real estate that produces an income, such as office space or shopping malls. By investing in a REIT, you get to enjoy the income and the capital gains generated by the REITs portfolio of properties.
You can invest in REITs by buying their shares on stock markets like SGX. REITs in Singapore typically pay out dividends, which enables you to enjoy passive income from your stock holdings.
Are Reits A Risky Investment
Some REITs are riskier than others, and some are better suited to withstand economic declines.
No investment is free of risk, and REITs come with risks and rewards specific to them. As mentioned above, theyre generally more sensitive fluctuations in interest rate, which have an inverse influence on their value.
Additionally, some REITs are riskier than others, and some are better suited to withstand economic declines than others. For example, a REIT in the healthcare or hospital space could be more recession-proof than a REIT with properties in retail or luxury hotels. This is because people will continue using real estate associated with healthcare spaces regardless of an economic recession, while luxury real estate may not experience continued demands during times of economic hardship.
Risks aside, REITs do pay dividends, which can be appealing to investors. While REITS are not without risk, they can be a strong part of an investors portfolio.
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