REITs: Invest in Real Estate Without Leaving Your Computer

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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.

REIT Structures

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:

Specific Thesis

“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”

Basic Thesis

“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.

Finding REITs

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:

  1. Search through finance.yahoo.com
  2. Complete a keyword search on Seeking Alpha
  3. 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

Analyzing REITs

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:

Net Income
– 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

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About Author

Ankit Duggal(G+) is the Investment Director of a New Jersey Income Operating & Consulting Company . Ankit is a seasoned value investor who enjoys achieving a zen through surfing, hot yoga, and snowboarding.

10 Comments

  1. Everyone in real estate (and most any other business, in fact), strives to maximize the use of OPM–Other People’s Money–to springboard themselves to riches.

    The issue with REITs is that *you* become the OPM in this case, and the people running a REIT will never be as careful with OPM as they would with their own. Furthermore, the company running the REIT is taking out money for themselves at every step of the way.

    REITs may indeed be a way for people to make money in real estate without having to fix toilets, but the real money made in REITs is by the people running the REIT itself.

    • Matty

      Valid point. REIT operators do make money but if they are good operators then they create shareholder value through dividend increase which eventually translates into capital price growth over time.

      • Along this line of thinking, have you ever seen any good case studies or breakdowns of how REIT operators earn money? I’ve wondered that for a while but haven’t really taken the time to do any research. Seems like you might be the guy to ask :).

        • Yeah I am really curious about that too. I just can’t connect the dots there for how that transforms into incoming cash.

        • Brandon
          A great place to get that potential information is a school’s REIT center like NYU, Wharton potential places to seek out. I hope that helps

          Ankti

  2. Ankit, there are several single family REITs at some point in the process of going public, with Silver Bay Realty Trust (SBY) being the only public one I think that directly invest in residential single family properties on a rental basis. Do you have any thoughts on how they are performing in regard to the management of so many individual assets?

    • Craig

      You my friend are very astute. I know that SBY just IPO’d recently. I have a general issue with the economies of scale that can exist with single family rentals. I am not a believer that an operator can great tremendous Alpha by having 1,000’s of single family that are spread apart and have 1,000’s of individual heating units, roofs, boilers. It is hard enough when you have one heating system that is supporting 10 units in a multifamily building. The sheer manpower keeps growing as more assets are brought in so is there ever economies of scale. That is the investment thesis question that will make or break that REIT in my personal opinion.

  3. Ankit,
    Are REITs long term investments? I mean does it take a while to get a return on your investment? You see when I start investing I will be starting with minimal capital. Would REITs be a good way to raise capital to fund future investments?

    I loved reading the blog, very interesting.

    Terry

    • Terry,
      REITs can be long term investments but they have to be made with the capital markets in mind. The return profile of REITs are driven by the dividend that they pay out usually on quarterly basis together with stock price appreciation that occurs when the market is hot. For instance in the past 12 months, the REIT industry has returned a higher return than the S&P 500.

      Your last question confused me a bit as you can setup a REIT Special Purpose Vehicle to raise funds, but you need to follow all the REIT requirements of registering as a REIT and having at least a 100 investors, which in turn would subject you to SEC capital raising regulations.

      I hope these answers help in your quest to better investing and returns.

      -Ankit

  4. Stocks are to Housing (with toilet hassles) as Mutual Funds are to REITs (without toilet hassles)

    If you want to control the deals and hence your cash on cash return and/or be an active participant looking at the market, invest in toilets. If you want to let someone else control your return via dividends in exchange for ingnorance being bliss and the privilege of sticking your head in the sand like an ostrich, then invest in REITs. You can trade your time and be active with tighter control for a higher return or to trade your passivity and peace of mind for a deduction of the return pie. You can invest in a mini-REIT by buying toliets and paying for property management. Make your choice.

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