REITs

8 Replies

Has anyone been involved with REITs? Is it a good route to go down?

@Danny Diaz 

I own several REITS. Couple domestic, one foreign.

Particularly in the traditional real estate investing community, there are many different opinions on the value of investment products (those traded on stock exchanges). I don't want to open up that debate here. Let's just understand that I believe stocks, bonds, funds, and physical real estate can be used to build wealth. I also believe that the whole is greater than the sum of the parts.

I use REITs as another way to diversity my stock portfolio. It makes up a smaller percentage than my corporate stocks, but it tends to have a lower correlation with corporate stocks and bonds, and that provides strength through diversity. 

I treat my physical real estate as a separate category. Thus, while I invest in REITs on a weekly basis, I do not consider any of that investment as a contribution to my real estate goals. Instead, I view it the same way I would a stock purchase. There are some who would disagree with this distinction. I think it's keen to note that when you buy a REIT, you are buying shares in a company that purchases and manages real estate. For this reason, I think of it like a stock.

Hope that's helpful. If you want to talk about more of my philosophy on the relative value of these products, feel free to send me a message.

Originally posted by @Trevor Ewen :

@Danny Diaz 

I own several REITS. Couple domestic, one foreign.

Particularly in the traditional real estate investing community, there are many different opinions on the value of investment products (those traded on stock exchanges). I don't want to open up that debate here. Let's just understand that I believe stocks, bonds, funds, and physical real estate can be used to build wealth. I also believe that the whole is greater than the sum of the parts.

I use REITs as another way to diversity my stock portfolio. It makes up a smaller percentage than my corporate stocks, but it tends to have a lower correlation with corporate stocks and bonds, and that provides strength through diversity. 

I treat my physical real estate as a separate category. Thus, while I invest in REITs on a weekly basis, I do not consider any of that investment as a contribution to my real estate goals. Instead, I view it the same way I would a stock purchase. There are some who would disagree with this distinction. I think it's keen to note that when you buy a REIT, you are buying shares in a company that purchases and manages real estate. For this reason, I think of it like a stock.

Hope that's helpful. If you want to talk about more of my philosophy on the relative value of these products, feel free to send me a message.

 Thanks for the response Mr. Ewen, helped a lot! So how's the return on REITs? would you say it out weighs stock investments? 

@Danny Diaz 

In my experience, REITS have been an excellent investment vehicle, particularly in 2014 (took some time to speed up, corporate stocks did much better in 2012-13). They have actually been my strongest performers in the last 3 months.

They basically behave like a stock for me. However, some come with higher dividends than a corporate fund. As mentioned, the lower correlation with stocks is desirable.

I am keen to note that you don't get a lot of the 'Sweet Extras' you get with physical real estate investing. Buying under, fixing up, then renting at market value, taking advantage of loan vehicles (FHA, VA, Tax Credits). These are all great tools at the disposal of individual investors like you and I. REITS are large companies. Their investments often reflect larger (cyclical) trends in a market. Their ability to analyze something deal by deal has its limits, due to their large scope.

I like to think of them as the dinner guest that eats a ribeye steak, but leaves a ton of meat on the bone. You and I can see (and eventually taste) that meat. That is a big advantage of personal real estate investing.

Originally posted by @Trevor Ewen :

@Danny Diaz 

In my experience, REITS have been an excellent investment vehicle, particularly in 2014 (took some time to speed up, corporate stocks did much better in 2012-13). They have actually been my strongest performers in the last 3 months.

They basically behave like a stock for me. However, some come with higher dividends than a corporate fund. As mentioned, the lower correlation with stocks is desirable.

I am keen to note that you don't get a lot of the 'Sweet Extras' you get with physical real estate investing. Buying under, fixing up, then renting at market value, taking advantage of loan vehicles (FHA, VA, Tax Credits). These are all great tools at the disposal of individual investors like you and I. REITS are large companies. Their investments often reflect larger (cyclical) trends in a market. Their ability to analyze something deal by deal has its limits, due to their large scope.

I like to think of them as the dinner guest that eats a ribeye steak, but leaves a ton of meat on the bone. You and I can see (and eventually taste) that meat. That is a big advantage of personal real estate investing.

Based on what you said, I'd say its a wise investment. Which leads me to my next questions! How do you get involved with something like this and how would you determine if it brings higher dividends prior to investing in REITs? Sorry if it seems I don't know anything but truth is I don't! I'm trying to see what my options are 

@Danny Diaz 

All of the REITs that I invest in are traded on stock exchanges. In other words: they are available as an investment product open for anyone's purchase. 

As for dividends, I just look at their SEC yield numbers (dividends reported to the SEC in the last 30 days), and also their historical SEC yields.

In the end, I choose REITS based on low commission / dividend ratio. I also desire diversity among the REITS themselves (some domestic, some foreign). Financial advisors would be unlikely to recommend having more than 10% of an equity portfolio in REITS. 

I don't think I can make any specific recommendations. But here is a good list of recently critically reviewed REITS:

http://money.usnews.com/funds/etfs/rankings/real-estate-funds

I have studied REITs in detail as an investment banker.

Negatives to REITs:

1) When you invest in a REIT you invest at a certain P/FFO (a cash flow metric) multiple so you are not buying at par. To put it another way there is a certain future performance built into those numbers

2) Costs- REITs have costs that hurt returns that most investors that you can JV with or yourself do not have. Administrative costs, fancy offices, filing costs, etc. All that comes out of the total cash flow and the amount you get as a dividend.

3) Agency Problems - REIT executives are not necessarily 100% aligned with your interests as a shareholder.

4) Size- Probably the biggest disadvantage. REIT executives have ever incentive to grow and grow because the larger the company is the larger their compensation and the greater the prestige. The problem is that size hurts returns. The bigger you are the smaller your deal pool becomes because there are only so many deals that move the needle and thus the lower returns one has to accept to not have cash just sitting there. So while you as an investor can find a motivated seller and get a good deal, its much harder to a REIT to do this over and over again in large deals where most sellers are a lot more rational. Those that have been built to get around this like American Homes 4 Rent need a ton of inventory to make a dent and as such its doubtful they will get the same deals you can if you do your homework.

Of course on the flip side there are positives such as the fact that a REIT management team will avoid some of the mistakes one if bound to make a newer investor and they can be a lot more sophisticated in their financing. 

@Danny Diaz & @Charles Worth  

Recently detailed this in my member blog here. Interested in your thoughts.

@Trevor Ewen  Agree with most of what you said and it was a great article.

The only thing I would say on certain points is:

1) Certain REITs will give enough detail so you can calculate NAV (what you called baseline value). Normally the smaller ones and its few and far between.

2) You said you can trade on margin (though I think you were saying what I am about to say without saying it when you said don't trade on margin) however margin has almost nothing in common with RE debt for two reasons. 1) You can't get nearly as much of it as you can on RE 2) most important your RE is not checked on a daily basis for value. When your home goes down in value over a 2 month timeframe your bank does not call you and ask you to put more cash in, your broker will and can sell your asset without your permission when you don't do it quick enough. 

3) You said REITs have nowhere to go but down. I think this is probably true but it changes all the time and does not apply to all REITs. Some REITs operate in markets that still probably have room to run and I just saw an article (I didn't read it yet) that commercial cap rates on certain for purchases have climbed up again meaning they will make more money on these purchases. Point is the past gain or loss means nothing its the fundamentals of the market they are in that matters.

All in in all I think if someone really does not want to learn about any details one has to learn that takes time (how much to put in for R&M in a property, how to buy a property correctly, how to fund ppl you can trust in your RE network, etc.), wants income and is really comfortable analyzing the market trends to pick a REIT (office market, storage market, commercial residential market, etc.) than a REIT can be a good investment. For reasons you pointed out it just won't be nearly the same as owning property because there are so many layers of costs, management, etc. 

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