This is chapter two of a guide
to REIT stocks. Begin here.
Download the entire guide as PDF to read and reference at your own pace.
I wrote this guide to real estate investments trusts with two group of readers in mind. The first group has some experience in buying and selling stocks - and has a specific interest in understanding REIT stocks.
To this group of readers, the guide will serve as a primer on REIT investing by describing the world of REITs. The second group of readers already understands what a REIT stock is but would like to deepen knowledge in the valuation of REITs.
Chapter four introduces key valuation concepts, such as funds from operations and net asset valuation. Investing, it is often said, is more art than skill, and for the second group of readers, this guide to REIT investing should serve as canvas for painting.
REITs are akin to mutual funds. Both REIT managers and mutual funds managers use equity and debt to buy assets. In the basic form, REIT managers buy real estate buildings, or mortgages backed by real estate, and distribute excess cash flow to investors. Mutual funds managers buy stocks or bonds and distribute to investors capital gains, interest income and dividends.
Both investment vehicles are required to distribute at least 90% of the taxable earnings to avoid paying federal taxes. And so, the REIT investor often compares the REIT's dividend yield to other fixed income instruments -
a certificate of deposit or a checking account.
The National Association of Real Estate Investment Trusts (NAREIT) offers us a formal definition:
A real estate investment trust (“REIT”) is a company that owns, operates or finances income-producing real estate. REITs provide all investors the chance to own valuable real estate, present the opportunity to access dividend-based income and total returns, and help communities grow, thrive, and revitalize.
Blindly buying stocks is easy. But whether you should buy stocks in the first place - and what kind of stocks - requires great effort and diligence. And the decision to buy stocks depends on your risk tolerance, return objective, time horizon and liquidity needs.
This is my way of saying that I wrote this guide not to entice you to buy specific REIT stocks, but to provide you with a resource as to how to think about REIT stocks in general.
Furthermore, while "what are the best REITs to buy in 2019" or "which REIT to buy right now" are popular key phrases on Google, the world of investing is not universal in that what is agreeable for one person may not be right for another. Quite the opposite.
In short, none of what I write about should be understood as stock investing advice.
"Buying a stock is fairly easy," said Mohnish Patrai. "It is 100 times harder to make a decision when to sell." With that in mind, this guide to REIT stocks does not answer the one-million-dollar question: when the best time is to sell.
Some investors use rule of thumb rules such as if the stock multiplied in price in a period of less than three years; other investors claim that they buy stocks for the long haul and effectively will not sell a stock unless the company’s business fundamentals materially deteriorated (what Marty Whitman called investment risk.)
Because this is a highly subjective issue, without clear, data-driven principals to support one thesis from the other, I left the topic of out of this guide.