How To Pick the Right REIT

Written by Posted On Wednesday, 04 October 2017 09:43
Although most people interested in real estate investing want to flip or rent homes, there are many other ways to be involved. You can wholesale properties. You can buy tax liens and deeds. Or, you can choose to pool your money with other investors in something known as a real estate investment trust (REIT). 
What Is a REIT?
The REIT is a security that invests in real estate. This can be actual properties or mortgages. REITs typically trade on the stock exchange. 
They can be a good investment because: • They give investors real estate in a portfolio that is easily liquidated • There are special tax considerations associated with this type of security • They offer high dividend yields with a mandatory payout ratio of at least 90% • Many offer dividend reinvestment plans (DRIPs) so that returns are reinvested and compound over time
Types of REITs
If you are considering using a REIT to invest in real estate, it will be important to know which one to choose. There are two main types of REITs: Equity and Mortgage. An equity REIT holds actual properties. A mortgage REIT holds mortgage securities. Although we’ll be focusing on equity REITs, both can be a great investment.
When it comes to equity REITs, there are many different categories. The National Association of Real Estate Investment Trusts has broken the trust into the following categories: • Diversified • Health care • Industrials • Infrastructure • Lodging/resorts • Mixed  • Office • Residential – apartments, manufactured homes • Retail – shopping centers, regional malls, and free-standing • Self-storage • Timber
With so many options, how do you choose the best REIT for you? Here are four things to consider to help you find a good investment fit.
1. The REIT Should Not Be Overvalued
Just like with more traditional real estate investments, the purpose of a REIT is to generate income. However, if you pay too much for your REIT, you will not see a good return on investment. Understanding how to value a REIT is beyond the scope of this article. However, the point is that, just like with any investment, paying more than it is worth will reduce your ROI.
2. The REIT Should Have a Good Outlook
Find a REIT that is investing in a real estate subsection with a good outlook. A REIT can have a good outlook for a number of reasons, such as: • Interest rate trends • Regulatory trends • Industry trends • Economic trends
Some examples are: • Health care, senior living, and self-storage REITs are doing well due to the age of baby boomers and their need to move and downsize • Data center REITs are doing well as corporations use more data for their market analysis
3. The REIT Should Be Poised to Grow
You will want to find a REIT that will grow its income from year to year. This can happen one of two ways: • Organically: By enhancing the assets, increasing rents, or increasing occupancy • Inorganically: Invest in new properties or undeveloped properties
4. Look at the Cap Rate, Not Just the Dividend Yield
The cap rate is based on the income the property will generate. The dividend yield is that income measured against market capitalization. Although everyone wants a great yield, this indicator falls short when providing clues about the health of the REIT.
The cap rate will help you understand the rental generating ability. The higher the cap rate, the higher the rental income is. A low cap rate with a high dividend means that the REIT is not going to continue producing a good ROI. The high dividend is likely due to accounting practices.
If you feel that investing in a REIT is for you, give me a call. I’d love to talk with you in more detail about this type of investing.
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John Trautman

John Trautman has spent his entire adult life in real estate. Purchasing his first property at 23, he learned the process of flipping and real estate holding from the ground up. Real estate continue to be his passion while he spent eight years as an account executive and later a vice President for Washington Mutual in the mortgage division. Holding the position of President’s Council and several years of President’s Club, he learned the lending business from the mortgage office perspective and lender perspective. Throughout his life he has also been a small business owner, commercial real estate holder, property designer, and house flipper.

During the downturn, John followed the deal to Detroit, Michigan, where he invested in single family rentals and multi-family dwellings. Once his returns were realized, he moved quickly to Arizona to invest in another distressed market.

His passion for making a deal and real estate has lead him to create a hands-on real estate investment mentoring club called Real Estate Knowledge Institute

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