Real Estate Investment Trusts - REIT
Many individuals are attracted to the benefits of investing in real estate,
such as current income or the potential for capital gain. Direct investment
in real estate, however, can require large amounts of capital, as well
as the time and expertise to properly manage real estate properties. At
times, the cyclical nature of real estate can make such investments difficult
to sell. One alternative to direct real estate investment is the real
estate investment trust (REIT). REITs allow small investors to share in
both the risks and rewards of real estate investing.
By law, REITS pay out at least 90 percent of their earnings as dividends
to shareowners. This gives them some of the highest dividend yields of
all investments. REITS are a special form of corporation that invests
only in real estate although they may own an array of properties from
malls and office buildings to apartment complexes and hotels. For investors
seeking fixed income vehicles and better returns, REITS continue to outperform
stocks as a group.
You need to examine local trends, though, before investing in a REIT.
Is the area over saturated? Are the properties in the REIT appreciating
and what is the debt-to-capital ratio? There’s more than a 40 percent
chance that the REIT you may want to invest in owes too much money. In
general, you want a REIT that has a good mix of properties, for instance,
apartment complexes in New York and office buildings in Atlanta. You also
need to know what the management track record of the trust is. Good property
managers can turn bad properties into moneymaking ventures while bad managers
can turn a good property into a money pit. To learn more visit the National
Association of Real Estate Investment Trusts at www.nareit.com.
Falling markets
While most markets have risen over the last five years, some are flattening
out, and some may have already dropped. This type of market offers great
opportunity to the savvy investor. When property values are falling, inventory
often rises, and many sellers become highly motivated when their properties
fail to sell quickly.
Motivated sellers will do whatever it takes to sell their property.
Whether sellers need to move from the area, are struggling financially
or have other pressing reasons to sell, they may well accept a below-market
offer.
Investors know that a weak market can offer extraordinary deals, though
flippers need to proceed with caution. In a falling market, even a few
months’ delay can turn a sound deal into a headache. It always pays
to know the market and purchase the property at a price low enough to
net an eventual profit, even if the market continues to fall.
The common myth is that you cannot make money buying in a bad real estate
market. In a bad real estate market, you can often buy “junker” properties
for 50 cents on the dollar and sell them for 60 cents. It’s all
in how you do the math.
It is worth noting that markets can and will change. If the market rebounds
after a purchase, then all is well for the investor. However, if the market
takes a downturn after a purchase, there can be trouble ahead. Markets
commonly show signs of slowing or turning over several months.
Sometimes the early signs come from national economic trends, such as
rapidly rising interest rates or sweeping changes in tax policies that
affect home ownership or investment (e.g., the rapid change in depreciation
rules for real estate investors in the late 1980s).
More likely, clues come from local market conditions, such as unemployment,
oversupply or a change in demand because of living conditions.
Exit Strategies
More important than guessing the future of a local market, you need
to have a clear plan in mind when purchasing property. A smart investor
knows exactly how he will exit the property before he buys. An even smarter
investor will have a backup plan or two, in case the first course of action
doesn't work.
In short, know your market and your plan before you begin to invest.
