ν. What's real estate investment trust (REIT).
ν. Strategies to start real estate investment trust (REIT)
ν. Is real estate investment trust profitable?
ν. The benefits of real estate investment trust.
ν. Designated distribution policy.
ν. Risk factors in real estate investment trust
ν. Real estate investment trust summery for beginners.
What's Real Estate Investment Trust (REIT)
When investors bring money together to invest in a real property, that's real estate investment trust. but there's more to it. when single unit individuals come with pooled resources to collectively fund an investment with aim of sharing dividends perhaps profit. that can the most prominent meaning of real estate investment trusts.
Real estate investment trusts REITs occur mainly in the level of industrial real estate which is very capital intensive investment. to actualize it in large scale single unit individuals (investors) pooled funds together under a trustee agreement.
When you invest in a real estate investment trusts (REITs), your money is pooled together with other investors' in a collective investment scheme that invests in a portfolio of income generating real estate assets such as shopping malls, offices, hotels or serviced apartments.
These assets are professionally managed and revenues generated from assets (primarily rental income) are normally distributed at regular intervals to REIT holders, after accounting for fees, such as REIT management fees and property management fees.
The REIT’s investment goal is to generate income distribution and long-term appreciation potential.
You can invest in them the same way as you would invest in stocks, through your broker.
Strategies to Start Real Estate Investment Trust (REIT)
You don't just rush into something because it's trending and people are doing it. when ever anything involves money is always necessary to be sure and know the bottom line of the investment before participating in it.
Design a strategy of investing, know people you want to invest with and know if their investment strategies suits yours. try further research on real estate investment by beginners to learn more.
Do not assume that REITs are low risk and that the dividend income is recurring. Read your prospectus and research reports to understand the investment objective and strategy of the REIT.
Look for information under the following three key areas:
- Information on the REIT manager – their experience and track record, and, if applicable, the REIT’s sponsor and pipeline of assets
- Information on properties to be put in the REIT – in particular, whether you are familiar with the geographical and sector exposures of the REITs you intend to invest in
- Other investment information such as dividend policy and fees and charges
REITs can have different structures, geographical or sector focus, and some REITs may carry more risk, such as political and regulatory risk, than others. You should:
- Read the “Investment Approach” and “Risks” portions of your prospectus for information on the various risks of the specific REIT you intend to invest in. Note that the risk elements may differ greatly between REITs depending on their investment objective and strategy, geographical and sector focus, quality of the underlying real estate properties, land tenure of properties (leasehold or freehold), experience of the REIT manager, and the income distribution policy.
- Consider if the REIT’s structure and risk profile suit your risk appetite and investment time horizon.
- Do not invest in a REIT if you do not understand or are not comfortable with its investment objective and strategy.
Is Real Estate Investment Trust Profitable?
Trustee is someone in charge of the investment trust together with trust manager or property manager, definitely there are the one with the financial plan to know to if it's profitable or not.
A wise real estate investor that has been into investment for long will detect if the REIT is profitable or not. before REIT must start an official public offer will be made to attract investors with their investment proposal plan.
The public offer of REIT proposal plan details the own and management of real estate investment by the trustee, trust manager and trust sponsor as the case may be.
Moreover, there're two major ways to know if the real estate investment trust is profitable to your or not.
- The benefits of the real estate investment trust.
- Designated distribution policy for the REIT.
1. The benefits of real estate investment trust
In other to be sure the REIT will pay off as expected it's important to consult and review the benefits of the REIT in the following ways;
- Diversification – The risk arising from investing in one property is diluted when you invest in a pool of properties through a REIT.
- Affordability – As an individual investor, you may not be able to afford a direct investment into a large asset such as office buildings or shopping malls. By investing in a REIT, you get to invest in these large assets in bite-size chunks.
- Liquidity – It is easier to buy and sell units in a REIT than to buy and sell properties. REITs are listed on the stock exchange and you can trade units in a REIT throughout the trading day.
- Tax benefits – REITs that distribute at least 90% of taxable income each year enjoy tax transparency treatment by IRAS (subject to certain conditions). Individual investors who receive these distributions also enjoy tax-exemption treatment. you can read more on REIT tax by clicking link on it.
2. Designated distribution policy for the REIT
Next thing is distribution policy involved, i don't really know for you but as an African man i'm. i will be willing to see how the funds will be distributed to the single unit individual (investors) at the end of the day.
You can find dividend distribution policy by checking out for this things below in the business proposal plan, during REITs public offering:
- What is the expected frequency and timing of distributions from the REIT?
- What are the adjustments made to income in determining the amount to be distributed?
- What are the circumstances under which a REIT may not make distributions, e.g. insufficient cash flow?
From the above procedures, even a blind man can tell if it's profitable or not. check out for those factors before investing your capital on REITs.
Risk Factors in Real Estate Investment Trust
There're several risk factors involved in real estate investment and let's look into from different sectors of real estate investment trusts. these factors includes:
Market risk
REITs are traded on the stock exchange and the market prices are subject to demand and supply conditions.
The prices generally reflect investor's confidence in the economy, the property market and its returns, the REIT management, interest rates, and many other factors.
Income risk
Distributions are not guaranteed and are subject to fluctuations in the REIT’s income. For example, a REIT’s rental income may be affected if tenancy agreements could be renewed at a lower rental rate than before or the occupancy rate could fall just like other share funds, mutual funds e.t.c.
Look out for whether the REIT has procured payment upfront or has contractual lock-ins of rental rates and other clauses in tenancy agreements.
If the underlying properties are financed by debts, there is a refinancing risk when cost of debt varies. A higher cost of debt may also reduce the income distributions to unit holders.
Concentration risk
If a substantial portion of the REIT’s value is from one or a few properties or a few tenants, you face a greater risk of loss should something happen to one of them.
Liquidity risk
A REIT may find it difficult to find buyers and sellers for its properties.
It may be difficult for REITs to vary their investment portfolio or sell its assets on short notice under adverse economic conditions or exceptional circumstances.
Leverage risk
Where a REIT uses debt to finance the acquisition of its properties, there is leverage risk.
If the REIT is wound up, its assets will be used to pay off creditors first. Any remaining value will then be distributed to unit holders.
Refinancing risk
As REITs distribute a large amount of their income to unit holders, they may not have the ability to build up cash reserves to repay loans as they fall due.
To refinance, they may need to borrow more (through bank borrowings or bond issuances) or undertake equity fund raising activities such as rights issues or private placements.
The refinancing cost could also be higher when loans are due for renewal.
Another risk is that the REIT is unable to secure refinancing and has to sell off some properties if they are mortgaged under the loan.
These risks could affect the unit price and income distribution of a REIT.
Land lease expiry risk
Where a REIT holds leasehold properties, the remaining term of the land leases will decrease over time, and the properties will have to be returned to the lessors upon the expiry of the land leases. The value of the REIT may be affected by the decreasing term or the expiry of the land leases, and this may result in a decline in the price of the units.
Other risks
While some REITS can offer diversity based on the type of properties or region you want to invest in, such diversification could carry other risks such as sector and country regulation risk.
Real Estate Investment Trust Summery for Beginners.
The summery of REIT to beginners who wish to start real estate investment trust, is to look out for those intensive key points below.
REITs is people bringing their money collectively to invest under a trustee, trust manager and trust sponsor investment plan. as a beginner always be smart enough, to know the integrity of the trustee which will handle the investment, the trust manager who acts as the REIT caretaker and the sponsor who is usually referred as the back bone and the general overseer of the trust funding and execution.
Study carefully the REIT strategy and business proposal plan, if you can't interpret it to your own best understanding, consult your real estate broker for more explanation and suspend investing until you're cleared on what you want to invest especially your return on investment.
There are many ways REIT make money but most ways is to lease property out to tenants and at some point sell it out but whichever means of receiving rental income. do you care about your cash flow on REIT? if yes monitor closely the distribution policy to know when the financial agreement is not fulfilled by the trustee, manager or sponsor of the REITs. if you notice any discrepancies sue them to court immediately.
Every investor knows that investment is about risk but every professional investor knows that investment success secret is taking calculated risk. name your risk factors in the real estate investment trust and know your chances of winning. your chances of winning should be greater than the chances of losing.
Lastly, always learn the new updates on the REITs market analysis from your broker, the recent increase on your personal ROI, ROE and profit margin in the current real estate business local market.
