How To Research and Invest in Real Estate Investment Trusts (REITs)

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Owning properties while collecting income from rents has been a dream for many. Unfortunately,  not everyone has the capital to buy out entire buildings. Perhaps, that’s the main reason why real estate investment trusts have become the primary choice for investors.

They are an excellent way for individuals to purchase publicly shared stocks, mutual and exchange-traded funds. What’s more, they’re ideal for those who seek to go beyond common forms of stock and fund income. In this regard, it’s safe to say that REITs have outgrown their purpose.

Now, they play a vital role in providing income from real estates such as apartments, malls, hotels and many more. You can safely enjoy investment exposure within or beyond Singapore without risking your finances. But since there are plenty of REITs, you must rely on a company that will guarantee your dividends. Here’s how to research before you decide to make your real estate investment:

How real estate investment trusts operate

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Real estate investment trusts, or REITs, are companies that focus on managing and investing in properties. In a sense, they work like mutual funds, thus collecting a pool of capital from individual investors. Consequently, the REIT invests in a portfolio of assets, returning a percentage of the real estate investment to its investors.

Real estate investment trusts have been operating since the second half of the 20th century. Their main goal is to allow individual investors to own equity stakes in more prominent real estate company. Consequently, this has changed the game in terms of stake ownership in significant real estate businesses.

As a result, many investors started buying and trading a diversified portfolio of real estate. In Singapore, rental income is not taxable at a corporate level, and companies must return at least 90% of their income to their shareholders. Since rental income is the primary source of dividends, it allows REITs to grow and provide more considerable income to investors.

How to research REITs

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Since REITs focus on real estate investment and dividend-paying stocks, you’d analyse them just like other stocks. However, there are some differences in terms of the accounting treatment of properties. Instead of using traditional metrics like earnings-per-share (EPS) and P/E, you should employ funds from operations (FFO) and AFFO. Another essential metrics to use when analysing REITs is net asset value (NAV).

Also, don’t forget to do a top-down and bottom-up analysis when picking stocks. The former will give you an objective economic perspective on different sectors. On the other hand, the latter will provide you with information on the fundamentals of various companies. Either way, you’ll get the best results with both approaches.

Typically, a rise in interest rates is a good sign for real estate investment. In such cases, people prefer to remain renters rather than buy a new home. Of course, REITs can also take advantage of lower interest rates. All they have to do is reduce the interest expenses, and they’ll effectively increase the profitability. Another point to look out for is the level of debt of the real estate investment trust.

Since REITs have relatively higher debt levels, you may want to compare the industry average in advance. The institutional demand for REIT equities is also a crucial factor, which may overwhelm fundamentals at first. Either way, you’d want to see a strong prospect for income growth. In this regard, the REIT you’re considering investing in must have an intelligent strategy for meeting your expectations.

Key points to consider before making a real estate investment

Ask yourself the right questions

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Usually, real estate investment offers much lower volatility than typical stock and fund exchange. Still, you’d want to consider your options before you invest in REITs carefully. Therefore, you should come up with a long-term strategy and take the time to research the market. If you live in Singapore, you should consider the following questions before anything else:

  • What are the investment trends in Singapore?
  • What type of real estate investment trust do you want to explore?
  • Are you aware of the consumer habits and demographics of Singapore?
  • Have you researched the current state of the economy in the country?

Invest wisely

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Perhaps, you may give answers to the questions yourself. Still, it may be a clever idea to let a professional assist you in researching and real estate investing. That’s why you should look for a reliable and well-known company that can guarantee high dividends. In this regard, you can look up some reviews and feedback from previous customers. Also, don’t forget to assess the FFO of each company.

Invest in quality real estate

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Last but not least, always bet on quality investments. That way, you’ll get a guaranteed return on your income and much more. On the other hand, you are paying for many but lower-quality investments that may not bring back your initial investment.

Final Thoughts

Finally, REITs are an ideal addition to any investor’s portfolio. The best thing about them is that they offer the perfect way to diversify any portfolio. Real estate investing is a long-term prospect that relieves you of the hassle that comes with being a property owner.

But doing so requires professional help from companies like Real Vantage. There, you’ll find thorough information about REITs and real estate investments in Singapore.

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