Consider yourself an opportunistic macro real estate investor that notices opportunities in varied asset classes throughout the country? I feel the same way at times. I am by no means the next Zell, or Ross but I wanted a method to participate in opportunities various real estate asset classes. Then I found out about Real Estate Investment Trusts (REIT).
During the course of Master in Real Estate at NYU, I started learning about REITs and I became fascinated by them. What made REIT so exciting to me is that they are a No Toilet Investment asset class that has higher liquidity than traditional real estate.
What are REIT’S
REITs are real estate holding companies run by real estate operators/real estate investors that invest into specific asset classes typically within a specific geographic concentrations. The IRS exempts REITs from paying income taxes at the corporate level, as long as they hold at least 75 percent of their investment portfolio in “qualifying” real estate investments. By law, REITs must also disburse 90 percent of their income or more to shareholders.
REITS are required to hold at least 75 percentage of their investments in qualifying real estate investments. The operative word is qualifying as real estate operators can invest into assets, mortgages, liens, or other REITs. There are three major types of REITs:
1) Equity REITs: Buy real assets i.e. retail, industrial, office, multifamily etc. Most REITs fall into the category of equity REITs, which own and actively manage income-producing commercial real estate.
2) Mortgage REITs: Invest into debt instruments.
3) Hybrid REITs: These REITs invest into both equity and debt assets.
How to Invest into REITs
Prior to going to Yahoo Finance and looking through random REITs stock tickers, it is important to develop your target asset investment thesis. The thesis should define what are you looking to invest into exactly. The thesis can be specific or basic:
“Seeking to gain exposure to the Class B office buildings in New York City, as there is growth in the startup offices that will be requiring need this type of office space”
“Seeking to invest into buildings targeting student renters, regardless of geographic location as the student housing market is poised for growth given the need for higher secondary education”
By defining the investment thesis you will be able to filter down REITs whose asset holdings and their strategy match your thesis.
After defining your investment thesis the next step is to find REITs that match your thesis. For the sake of simplicity we will utilize the Basic Thesis as our template example. We are seeking to find REITs that invest into Student Housing asset.
You can find potential REITs through one of three methods:
- Search through finance.yahoo.com
- Complete a keyword search on Seeking Alpha
- Google search: “Student Housing REITS”
I typically utilize search methods 2 to find potential REITs. I found the following three REITs that invest into Student Housing Asset space:
- American Campus Communities
- Education Realty Trust
- Campus Crest Communities
Now that we found REITs that match the investment thesis, how do you know which is investable? To answer that question we need to complete FFO and Dividend Growth rate. FFO is “Funds From Operations” is the real measure of profitability of a REIT. FFO is calculated as follows:
- less gains on sales of assets
- less income from mortgage-backed securities
+ plus depreciation and amortization
= Funds From Operations
REITs are a dividend/current yielding investment. Because of the importance of dividends, it is necessary to analyze the company’s annual dividend growth. You want to make certain that the firm has been constantly paying its dividends along with growing them every year.
REITs are a great No Toilet Investment asset class that allow investors to passively invest into varied asset classes and geographic regions without leaving their computer.
Do you homework and enjoy the REIT investment process!
Have you invested in a REIT? If so, what was your experience? If not, what is holding you back?
Photo: AJ Batac