Category: Modern comic book investing
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If retailers are experiencing cash flow problems due to poor sales, it's possible they could delay or even default on those monthly payments, eventually being forced into bankruptcy. At that point, a new tenant needs to be found, which is never easy. Therefore, it's crucial that you invest in REITs with the strongest anchor tenants possible. These include grocery and home improvement stores. Once you've made your industry assessment, your focus should turn to the REITs themselves. Like any investment, it's important that they have good profits, strong balance sheets, and as little debt as possible especially the short term kind.
In a poor economy, retail REITs with significant cash positions will be presented with opportunities to buy good real estate at distressed prices. The best-run companies will take advantage of this. That said, there are longer-term concerns for the retail REIT space in that shopping is increasingly shifting away from the mall model to online. Owners of space have continued to innovate to fill their space with offices and other non-retail oriented tenants, but the subsector is under pressure.
When looking to invest in this type of REIT, one should consider several factors before jumping in. For instance, the best apartment markets tend to be where home affordability is low relative to the rest of the country. In places like New York and Los Angeles, the high cost of single homes forces more people to rent, which drives up the price landlords can charge each month.
As a result, the biggest residential REITs tend to focus on large urban centers. Within a specific market, investors should look for population and job growth. Generally, when there is a net inflow of people to a city, it's because jobs are readily available and the economy is growing. A falling vacancy rate coupled with rising rents is a sign that demand is improving. As long as the apartment supply in a particular market remains low and demand continues to rise, residential REITs should do well.
As with all companies, those with the strongest balance sheets and the most available capital normally do the best. Healthcare REITs invest in the real estate of hospitals, medical centers, nursing facilities, and retirement homes. The success of this real estate is directly tied to the healthcare system. A majority of the operators of these facilities rely on occupancy fees, Medicare and Medicaid reimbursements as well as private pay.
As long as the funding of healthcare is a question mark, so are healthcare REITs. Things you should look for in a healthcare REIT include a diversified group of customers as well as investments in a number of different property types. Focus is good to an extent but so is spreading your risk. Generally, an increase in the demand for healthcare services which should happen with an aging population is good for healthcare real estate.
Therefore, in addition to customer and property-type diversification, look for companies whose healthcare experience is significant, whose balance sheets are strong, and whose access to low-cost capital is high. They receive rental income from tenants who have usually signed long-term leases. Four questions come to mind for anyone interested in investing in an office REIT.
What is the state of the economy and how high is the unemployment rate? What are vacancy rates like? How is the area in which the REIT invests doing economically? How much capital does it have for acquisitions? Try to find REITs that invest in economic strongholds. It's better to own a bunch of average buildings in Washington, D. The best known but not necessarily the greatest investments are Fannie Mae and Freddie Mac. They are government-sponsored enterprises that buy mortgages on the secondary market.
Just because this type of REIT invests in mortgages instead of equity doesn't mean it comes without risks. An increase in interest rates would translate into a decrease in mortgage REIT book values, driving stock prices lower. In addition, mortgage REITs get a considerable amount of their capital through secured and unsecured debt offerings.
Should interest rates rise, future financing will be more expensive, reducing the value of a portfolio of loans. In a low-interest-rate environment with the prospect of rising rates, most mortgage REITs trade at a discount to net asset value per share. The trick is finding the right one. For example, the growth of online commerce will continue to challenge retail REITs. On the other hand, the aging population will stoke demand for health care REITs.
Another example of a risk to evaluate is the rise of lodging alternatives such as Airbnb and their impact on the hotel sector. Finally, sectors are vulnerable to macroeconomic movements. For example, about a quarter of all publicly-traded REITs belong to the retail sector and therefore are susceptible to weakening economic trends and falling consumer confidence.
Rent Increases For many years, rent increases were depressed due to limited wage growth and subdued inflation. Both of these factors are currently on the rise, creating a positive momentum for rent increases. However, you should also check for changes in supply vs demand. In the last year, several sectors have seen an increase in the supply overhang that limits rent increases. Early redemption fees and restrictions might be excessive.
Management fees might be excessive. The true yield is the month distribution divided by the net asset value, thereby smoothing out the impact of occasional special dividends. Total REIT returns consist of their yield and their capital appreciation. You might want to look askance at dividends that include a large return of capital due to depreciation, since these are a non-cash expense and might not be sustainable, introducing an element of risk. Outperforms investments in direct real estate and stock indices.
Increases diversification of your investment portfolio, thereby lowering overall risk.
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Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns. These are the characteristics of real estate investment.
REITs have historically provided high dividends plus the potential for moderate, long-term capital appreciation. REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term total returns of REIT stocks tend to be similar to those of value stocks and more than the returns of lower risk bonds.
Because of the strong dividend income REITs provide, they are an important investment both for retirement savers and for retirees who require a continuing income stream to meet their living expenses. REITs dividends are substantial because they are required to distribute at least 90 percent of their taxable income to their shareholders annually.
Their dividends are fueled by the stable stream of contractual rents paid by the tenants of their properties. The relatively low correlation of listed REIT stock returns with the returns of other equities and fixed-income investments also makes REITs a good portfolio diversifier. This oversight provides investors with a measure of protection and more than one barometer of a REIT's financial condition. Portfolio Diversification : REITs offer access to the real estate market typically with low correlation with other stocks and bonds.
A majority of advisors agree on the underlying long-term fundamentals that support inclusion of REITs within a diversified portfolio. This may be years after you have made your investment. As a result, for a significant time period you may be unable to assess the value of your non-traded REIT investment and its volatility.
To do so, they may use offering proceeds and borrowings. This practice, which is typically not used by publicly traded REITs, reduces the value of the shares and the cash available to the company to purchase additional assets. This can lead to potential conflicts of interests with shareholders. For example, the REIT may pay the external manager significant fees based on the amount of property acquisitions and assets under management. These fee incentives may not necessarily align with the interests of shareholders.
Generally, you can purchase the common stock, preferred stock, or debt security of a publicly traded REIT. Brokerage fees will apply. Non-traded REITs are typically sold by a broker or financial adviser. Non-traded REITs generally have high up-front fees.
Sales commissions and upfront offering fees usually total approximately 9 to 10 percent of the investment. These costs lower the value of the investment by a significant amount. The shareholders of a REIT are responsible for paying taxes on the dividends and any capital gains they receive in connection with their investment in the REIT.
Dividends paid by REITs generally are treated as ordinary income and are not entitled to the reduced tax rates on other types of corporate dividends. Consider consulting your tax adviser before investing in REITs. You should also check out the broker or investment adviser who recommends purchasing a REIT. To learn how to do so, please visit Working with Brokers and Investment Advisers.
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