Earn passive income from Real estate stocks.
Nowadays, one way or the other real estate related terms crawls up in our social discussions. Everyone can now partake in real estate investing because of the leverage it offers.
With just a minimum down payment of about 30% you can buy a property. If you don’t have the down payment you can get a loan. The complete cash to buy and rehab the property is lent to you.
When you rent the property. You generate monthly cash flow from the property.
A certain percentage is used to pay the loan you borrowed, the interest tied to the loan and also take care of other expenses. The remaining cash goes into your own pocket.
These steps can be overwhelming for someone who is new to real estate. There are a lot of things you will need to learn and master to become comfortable with the process. Which will require utmost focus and dedication.
You do not need to wait that long or pass through the stress to invest in rental properties. An alternative is investing through organizations called Real Estate Investment trusts or short form, REITs.
What is a Real Estate Investment Trust?
A Real Estate Investment Trust is a company that collects investors money and uses it to acquire or finance different varieties of rental properties that generates steady income.
These companies collects and manages its investors money by buying and owning mostly commercial real estates. They can also lend their investor’s money to other investors that are in need of capital to acquire income producing assets.
You can invest in REITs as an individual or a mutual fund or a fund that tracks a particular index. As an investor you benefit in two ways. By growth in the value of the REIT stock and dividends paid by the company to its investors. REITs and Utility companies pay high dividends to its investors.
Types of REITs.
- Equity REITs
These type of REITs acquire and manage rental properties. Income is generally gotten from rents received from the tenants.
- Mortgage REITs
These type of REITs lend money to real estate investors and operators. Income is gotten from the interests paid by the borrower.
- Hybrid REITs
These type of REITs combine both equity and mortgage REITs in their business.
REITs can be further classified based on how its shares are bought and held.
- Publicly traded REITs
These are REITs are listed on National Securities Exchange. They are regulated by the Securities Exchange Commission. There shares are traded in a stock exchange. They are liquid because of the high volume.
- Public Non-Traded REITs
These are REITs are not listed on National Securities Exchange. They are regulated by the Securities Exchange Commission. These shares are less liquid compared to publicly traded REITs.
- Private REITs
These REITs are not listed on National Securities Exchange. They are also not registered by the Securities Exchange Commission.
Here are some 6 metrics to tell you about a REIT’s financial health/condition.
- Price to free cash flow
This is a valuation ratio that tells you how cheap the company is. It is the ratio of the company’s share price to free cash flow per share. The result tells you how much you are paying for $1 of the free cash flow. The lower the ratio the cheaper the company.
- Free cash flow > net income
Free cash flow is the cash left after debts have been paid and dividends have been distributed. Whereby free cash flow is greater than net income. It signifies high quality earnings while free cash flow is less than net income signifies low quality earnings. It is never safe to invest your money in a REIT with low quality earnings.
- Price to book ratio
It is the ratio of the company’s share price to book value per share. Book value is the same as share holder’s equity which is listed on a balance sheet. The equity is what the shareholders own free after subtracting the company’s liabilities from its asset. This measure tells how much you are paying for $1 in equity. A P/B ratio less than equal to 3 (P/B <= 3) is fair. P/B < 1 is undervalued.
- Current ratio
This ratio tells if a REIT is able to pay its debt in a short period of time. That is, within a year. Current ratio is current assets divided by current liabilities. A ratio of more than 1.0 means the firm has more short term assets than short term debts.
- Debt to equity
The debt to equity ratio compares the company’s debt to its shareholder’s equity. The higher the ratio, it signifies the company owes a lot of money. This ratio is required to be low as possible. A ratio less than equal to 3 is good. That means the company owes <=3 times than its equity.
- Return on Equity
This ratio tells how profitable a company is. The formula is net income divided by the average shareholder’s equity. It tells how good a company rewards its shareholder’s from its returns.