Why NOI isn’t the strongest metric for evaluating a REIT’s growth?

The majority of investors often look for investments that offer great benefits without much risk. Individual real estate investments do provide many benefits, but they also expose investors to great financial risks as well. However, a REIT or Real Estate Investment Trust allows investors to own large income-producing properties without the burden of owning or managing the properties. A Real Estate Investment Trust is a company that owns and in most cases, operates income-producing properties. Most REITs receive income in the form of rents by leasing spaces to tenants. A REIT can be divided into two categories –

How Equity and Mortgage REITs make money?

Let’s consider the equity REIT first. Suppose ‘APC’ is an equity  REIT. APC owns a couple of large income-producing properties and puts them on lease. Now, the rent received by APC from the rented properties is the company’s profit.

Say PAC is a mortgage REIT. Suppose, PAC raises $10 million from its investors and borrows another $40 million at 2% annual interest. Now, the company invests $50 million in mortgages that pay 5% interest. In this case, the company’s annual interest expense is $0.8 million or 2% of $40 million. Whereas, its annual interest income will be $2.5 million, which is 5% of $50 million.

Therefore,

PAC’s net income = (annual interest income – annual interest expense)
                             = $(2.5-0.8) million = $1.7 million       

How to evaluate a REIT’s growth?

Some investors often use net operating income as a metric to determine a REIT’s potential growth. However, since depreciation expenses are subtracted from net operating income, it isn’t a precise metric for evaluating a REIT’s growth. Qualified Investors use FFO (Funds From Operations) and AFFO (Adjusted Funds From Operations) for evaluating a REIT’s growth. FFO is calculated by adding depreciation expenses and subtracting any gain or loss from the sale of the property. Let’s consider an example.

Let’s assume a REIT’s net operating income in the year 2018 was $545,989 and the depreciation expense was $414,565. Whereas, the profit obtained from the sale of the property was $330,450.

FFO = (Net operating income + Depreciation expense –  profit on property sale)
        = $(545,989 + 414,565 – 330,450)
        = $630,104

Now, the company will use this residual income to fund dividend payments. As per the rules, a REIT must distribute 90% of its income among its shareholders as dividends.

Undoubtedly, FFO is more precise metric than net operating income for evaluating a REIT’s growth. However, it doesn’t include capital expenditure, which is also important. Once the tenure of a lease ends and a REIT leases out the property to a new tenant, they need to carry out improvement works in the property. This increases the capital expenditure and the REIT can use a portion of its income for carrying out improvement works. Therefore, qualified investors prefer AFFO over FFO for evaluating a REIT’s growth. Though there is no particular method for calculating AFFO, investors calculate it by subtracting the capital expenditure from FFO. Let’s assume the capital expenditure in this case to be $160,212.

Adjusted Funds From Operation = (Funds From Operation – Capital Expenditure)
                                                            = $(630,104 – 160,212)
                                                            = $469,892 
As you can see, AFFO gives a more precise value, and that’s why it’s used by experts for calculating a REIT’s growth over the years.   

Innovative ways to plan a REIT Investment

A REIT generally has large investment properties in their portfolio. A REIT usually leases properties to tenants and earns income in the form of rent, which is then divided among its shareholders. In order to qualify as a REIT, a company must comply with the following rules –

How a REIT generates revenue?

Most REITs lease properties to tenants and make money from the rents, which is then divided among the shareholders as dividends. The majority of REITs trade on the National Stock Exchange and can be easily bought or sold. On the other hand, some REITs lend money to investors and earn interests on the loan. As you can see, a REIT’s source of income varies depending upon the sector in which that particular REIT operates.

Varieties of REITs

Profit  = (Annual interest income – annual interest expense)
             =$(3.5-1) million
            = $2.5 million.

The majority of REITs are equity REITs. However, trusts like mortgage REITs or publicly traded REITs also have their own benefits. Therefore, it’s important that you speak to an experienced REIT advisor, who can guide you through each of these REITs more deeply. We do have a team of highly qualified advisors for you. In no time, you could speak to up to three advisors.

Invest in REITs for long-term benefits

There won’t be any human on this planet who doesn’t want a secure and stable source of income in their life, particularly after retirement. That’s why people invest in mutual funds. The return may not be high, but there is an assurance. Same goes with REITs in real estate investment. REITs provide fixed returns (subject to market fluctuations) which increases along with the age of the investment. Though not every REIT functions in this way. There are different kinds of REITs available in the market, some of which trade on the National Stock Exchange.

Variation in REITs –

A Real Estate Investment Trust or REIT is a legal trust that owns, and in most cases, operates real estate properties. This kind of investment requires long term commitment and may not suit investors who like short-term benefits. The majority of REITs lease spaces to tenants and receive rents on those properties. On the other hand, some REITs fund loans to real estate developers.

Benefits of REIT Investment –

REIT investment is generally accompanied with many benefits, some of which are –

A Step By Step Guide for your REIT Investment

Published On - July 26, 2019

It’s an investor’s responsibility to keep searching for different investment options from time to time. Real estate investment requires a lot of patience and a positive attitude even in adverse situations. Buying a property only requires capital. However, maintaining the same property for a long time requires capital as well as a significant amount of time. That’s why some investors prefer mutual fund investment or Exchange-Traded Fund (ETF) over large individual real estate investments. An alternative to a mutual fund or ETF investment is Real Estate Investment Trust.

What is a REIT?

A Real Estate Investment Trust or REIT is a company or trust that owns, manages, and in most cases, operates income-producing real estate properties. REITs allow investors to own shares in real estate properties without the burden of purchasing and managing those properties. The majority of REITs lease spaces to tenants and earn rents on those properties. While some REITs also lend money to real estate developers and earn interest on the loan. This kind of investment requires a long-term commitment and it isn’t for investors seeking short-term benefits.

Who is it for?

Any investor can invest in REITs. Whether you’re a beginner or a pro, a REIT investment offers similar benefits to everyone. However, it may not suit every investor. An investment structure like REIT is more beneficial for retirees or someone who is on the verge of retirement than someone who is young and looking for short-term investments.  As REITs provide a steady flow of income for a long time, it suits people who have already hung their boots or are planning to do so.

What are the different types of REITs?

How to invest in a REIT?

You can invest in a REIT the way you invest in other company’s stocks or bonds. A REIT’s stocks can be easily purchased and sold on the National Stock Exchange. When you buy shares in a REIT, you invest in the trust and not in real estate properties. That’s why a REIT investment doesn’t qualify for a 1031 exchange. Real Estate advisors or experts can help in exploring the challenges that come with a REIT investment.

Should you use FFO or AFFO as a metric to measure a REIT’s cash flow?

Published On - July 26, 2019

Over the years, REIT investment has become a popular choice among real estate investors, particularly among the retirees. With benefits akin to that offered by a mutual fund investment, REIT lets investors invest in real estate properties without the burden of purchasing and managing those properties. The majority of REITs own, and in most cases operates, income-producing real estate properties. They lease spaces to tenants and then collect rents on those properties. Whereas, some REITs lend money to real estate investors and invest in mortgages and mortgage-backed securities.

Equity or Mortgage REIT – Which is better?

Equity REITs own and operate real estate properties. The primary source of income of an Equity  REIT is the rent they receive by leasing spaces to strong tenants. These kinds of  REITs provide high liquidity as their shares can be easily purchased and sold on the National Stock Exchange.

Mortgage REITs (mREITs) function in a different way. They lend money to real estate investors and invest in mortgage and mortgage-backed securities. The spread between the interest earned on the mortgages and the cost of financing the loan determines a Mortgage REIT’s income.

Since the Equity and Mortgage REITs have different working models, both are beneficial in different ways. Investors seeking instant income can go with Equity REITs. However, as they trade on the National Stock Exchange, they are subject to market risks. On the other hand, those who require funds for their real estate adventures may find Mortgage REITs a blessing in disguise.

How to evaluate a REIT’s cash flow?

Some real estate analysts use FFO (Funds From Operations) as a metric to measure the revenue generated by a REIT. There is a whole formula for calculating FFO. Analysts calculate FFO by adding depreciation and amortization in the net income minus any gain from the sale of real estate properties.

FFO = Net income + Depreciation + Amortization – Gain from the sale of real estate

FFO helps in calculating a more precise value as it adds depreciation in the net income and subtracts any gain the REIT has made from the sale of its real estate. Some analysts also use AFFO (Adjusted Fund From Operations),an advanced version of FFO, to get a more precise value. While there is no derived formula for calculating AFFO, it is taken out by subtracting recurring expenditures from FFO that are first capitalized by a REIT and then amortized. It could be some minor maintenance expenses such as money spent on changing floor carpet or repairing damaged ceiling, and so on.

AFFO =  FFO – Recurring Capital Expenditure

Both FFO and AFFO are used by analysts for calculating a REIT’s cash flow, and you too can use either of them. As REITs don’t need to make maintenance expenditures every day, you may ignore it. However, if you need a more precise value, consider subtracting it from a REIT’s FFO.

Real Estate Investment Trust – Who should invest?

Published On - August 2, 2019

A Real Estate Investment Trust is a company or trust that owns, and in most cases, operates real estate properties. REITs allow investors to invest in income-producing properties without the burden of going out and purchasing those properties. The business model of a REIT varies depending upon what kind of REIT it is. The majority of REITs make money by leasing spaces to tenants and then collect rents on those properties. A REIT’s benefits are akin to that of a mutual fund investment.

How a REIT is formed?

To form a REIT, a company must fulfill the following requirements –

Which REIT Investment is better?

There is no thumb rule for investing in REITs. Depending upon the objective behind the investment, an investor can invest in any of the following REITs –

The majority of REITs are listed with the Securities and Exchange Commission (SEC) and trade on the National Stock Exchange. However, some REITs that don’t trade on the National Stock Exchange or are not listed with the Securities and Exchange Commission. Private and Non-Publicly Traded REITs are a few to name.

REITs require a long-term commitment, investors eyeing short-term benefits should stay away –

What a REIT investment requires from you is a long-term commitment. Just like a mutual fund investment, a REIT investment gets better and better along with time. It may not suit investors who are looking for short-term investment options. A REIT’s large structure makes it suitable for small investors as the entry cost is usually on the lower side that may start from as low as $500 or the price of one share. Therefore, anybody looking for a secure and stable flow of income can invest in REITs.   

Do you need to be an accredited investor to invest in REITs?

What does being an accredited investor means?

There is no process of becoming an accredited investor. You don’t  need to apply for a license or pass a test to qualify as an accredited investor. Instead, your wealth or to be precise your annual income determines your accreditation. As per the Securities and Exchange Commission (SEC), to qualify as an accredited investor, an investor must have an individual income of more than $200k per year or a joint income of $300k. Many real estate investment structures accept only accredited investors and non-accredited investors can’t invest there.

What is Real Estate Investment Trust (REIT)?

A Real Estate Investment Trust or REIT is a private trust that owns, and in most cases, operates income-producing real estates. REITs have large institutional-grade properties in their portfolio. Some REITs invest in the commercial sector, while some are inclined towards the healthcare sector. The majority of REITs lease spaces to tenants and receive rents on those properties. Whereas, some REITs lend money to real estate investors and  earn interests on the mortgages and mortgage-backed securities. With benefits akin to that of mutual fund investment, REIT investment offers a steady flow of income for a long time.

Do I need to be an accredited investor for investing in REITs?

No, you don’t need to be one. Any investor can invest in REITs irrespective of how much wealth they possess. You can invest in a REIT just like you invest in the stocks of other companies. The majority of REITs are listed with the Securities and Exchange Commission and trade on the National Stock Exchange. Shares of a REIT can be easily bought and sold on the National Stock Exchange. As a REIT’s shareholder, you’ll be subject to receive dividends like other shareholders.

What are the different types of REITs?

There are three major kinds of REITs where you can invest –

How to plan a REIT investment?

Though you can invest in a REIT with the help of a broker, you may want to consult your financial advisor or a REIT expert before that. As shares of a REIT can be bought and sold on the National Stock Exchange, a REIT investment is subject to market risks.

Everything You Should Know About Real Estate Investment Trust

Published On - August 12, 2019

Though real estate investments offer great benefits, they don’t guarantee fixed returns. Holding an investment for a long time may result in rising maintenance expenditure on the property, which increases an investor’s liabilities. To give investors a flexible and more secure investment structure, REIT investment was introduced in the United States.

What is a REIT?

A Real Estate Investment Trust or REIT is a company that owns, and in most cases, operates income-producing properties. Akin to mutual fund investment, REITs allow investors to invest in a more flexible and secure investment structure. The majority of REITs lease spaces to tenants and receive rents on those properties. That’s their main source of income.  On the other hand, some REITs lend money to real estate investors and invest in mortgage and mortgage-backed securities.

How a REIT is formed?

A company must fulfill the following requirements to form a REIT –

Benefits of REIT Investment –

Types of REIT –

What’s the right time to invest in REITs?

There is no so-called right time to invest in REITs. REIT investment can be planned anytime in a calendar as it provides the same benefits irrespective of the time when the investment is made. However, you may want to consult your financial advisor or a REIT expert before investing in REITs.