You’ve probably heard the saying that you never lose when you invest in property. While property can be a solid investment, traditional real estate investing can also be a headache. It’s a longer-term commitment that depends on a fluctuating real estate market and can produce illiquid investments. However, a real estate investment trust (REIT) offers a hands-off way to benefit from real estate by investing in property that is highly liquid.
Quick Look at the Best REIT Stocks
- Vornado Realty Trust
- Annaly Capital Management Inc
- Realty Income
- SL Green
- American Tower
Overview: REIT Stocks
REITs are companies that own and operate real estate or real estate debt. REITs are publically traded on the stock exchange. These companies buy real estate or real estate assets using combined investments from investors. Most REITs focus on a particular property type, but some hold multiple types of properties in their investment portfolios.
A REIT buys and develops real estate with the intent to lease property space and collect income. REIT companies are required by law to pay at least 90% of their taxable income for shareholders via dividends. REIT shareholders can earn a steady income from their investments but are required to pay taxes on that income.
There are 4 types of REITs:
- Equity REITs are the most common type of REIT investment. Equity REITs own or operate income-producing real estate, are publicly traded and generate revenue from rental incomes and typically invest in retail, residential, industrial or resort properties.
- Mortgage REITs (mREITs) provide financing for real estate by lending money to real estate buyers or acquiring mortgages. mREITs are publicly traded and generate income from the interest earned on mortgage loans.
- Public, nonlisted REITs (PNLRs) are registered with the U.S. Securities and Exchange Commission (SEC) but are not traded on major securities exchanges like equity REITs or mREITs. PNLRs work similarly to equity REITs and generate funds from rental incomes. However, PNLRs face redemption limitations that can affect their liquidity. Generally, liquidity options are limited to share repurchase programs or secondary marketplace transactions.
- Private REITs are real estate funds or companies exempt from SEC registration. They don’t trade shares on the national stock exchange and can only be sold by brokers to institutional investors. Share redemptions vary by company and can be limited.
Best Online Brokers for REIT Stock
You can invest in REITs individually, through an exchange-traded fund (ETF) or a mutual fund.
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Features to Look For in REIT Stocks
REITs are a way to add real estate into your investment portfolio without becoming a landlord or having to invest large sums of money in a property yourself. When deciding what REIT to invest in, keep an eye out for these key features.
1. Funds From Operations (FFO)
Since REITs invest in real estate, all of a REIT’s assets are depreciable. However, unlike traditional businesses, depreciation doesn’t cost REITs anything — in fact, just the opposite. The value of real estate tends to go up over time.
FFO refers to a REIT’s cash flow from operations and is calculated by adding depreciation and amortization to earnings then subtracting gains on sales. By adding depreciation expenses, a FFO provides a clearer picture of how much money a REIT makes. Many investors view FFO as the most important REIT-specific metric to understand before investing in a REIT.
2. Free Cash Flow (FCF)
FCF refers to the cash left over after a company accounts for its cash outflows to support operations and pay capital expenditures. With FCF, companies can pay dividends, debts and interest to investors among other things.
FCF measures profitability by excluding noncash expenses and including changes in working capital. By including these changes, FCF can help investors determine whether a company is able to pay its expected dividends or interest.
3. Net Asset Value (NAV)
Real estate values are not always easy to determine, presenting a big challenge to REIT investors. Instead of relying on book value or earnings per share (EPS) to determine unit value, many REITs focus instead on net asset value (NAV).
NAV refers to the estimated market value of a REIT’s total assets minus the value of its liabilities. When NAV is divided by the number of common shares, it can be a useful reference point for determining a company’s valuation and share price.
Slow and Steady
Investing in a REIT as part of a long-term investment strategy can enhance your investment portfolio’s stability and earnings. When choosing a REIT, make sure you research the company to determine what percentage of its assets are invested in real estate or real estate holdings. A solid REIT holds a range of diverse assets in its portfolio in order to protect itself against downturns in the real estate market and provide slow but steady growth in the long term.
Frequently Asked Questions
What does REIT stand for?
REIT stands for Real Estate Investment Trust.