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How to Analyze a Real Estate Company and Understand REITs

Sectors and Industries • Beginner Investing • 6 min

What this lesson is about

You don't need to buy a building to invest in real estate. REITs let you own a slice of real, income-producing property through an ordinary brokerage account.

2 parts · a quick check after each · then the quiz

Part 1 of 2

A, REIT, (Real, Estate, Investment, Trust), is, a, company, that, owns,, operates,, or, finances, income-producing, real, estate., It, trades, on, public, stock, exchanges, like, any, other, stock., This, gives, you, real, estate, exposure, without, the, hassle, of, buying,, managing,, or, financing, a, physical, property, yourself., U.S., tax, law, requires, REITs, to, pay, out, at, least, 90%, of, their, taxable, income, to, shareholders, as, dividends., This, is, how, they, avoid, corporate-level, income, tax., That's, why, REITs, are, famous, for, their, high, dividend, payouts, compared, to, most, other, companies.

When, evaluating, performance,, REIT, investors, often, look, at, Funds, From, Operations, (FFO), instead, of, standard, net, income., Why?, Real, estate, depreciation, is, a, large, non-cash, expense, that, can, significantly, understate, a, property's, actual, cash-generating, performance., Real, estate, often, doesn't, lose, value, the, way, standard, depreciation, suggests., FFO, adds, that, depreciation, back, to, net, income,, giving, a, clearer, picture, of, real, cash, flow.

What being locked up is worthPayment for losing the option to change your mind.

Quick check

What is a REIT (Real Estate Investment Trust)?

Part 2 of 2

Insider, Angle:, REITs, are, sensitive, to, interest, rates, for, two, reasons., First,, they, often, rely, on, significant, debt, to, finance, property, acquisitions,, so, higher, rates, boost, borrowing, costs., Second,, higher, rates, can, make, REIT, dividend, yields, less, appealing, compared, to, safer, investments, like, bonds., This, can, hurt, REIT, valuations, even, if, the, underlying, property, fundamentals, stay, the, same., It’s, also, important, to, know, what, type, of, property, a, REIT, focuses, on., Residential,, office,, retail,, industrial/warehouse,, and, data, centers, all, have, different, demand, drivers., For, example,, e-commerce, growth, has, impacted, retail, REITs, and, industrial/warehouse, REITs, in, opposite, ways.
Try, This:, Look, up, a, REIT, that, interests, you., Identify, its, specific, property, type, focus., Then,, research, one, structural, trend—like, e-commerce,, remote, work,, or, data, demand, growth—that, could, help, or, hurt, that, property, type,, and, how, it, differs, from, other, REIT, types.

Quick check

Why do REITs typically pay out an unusually large share of their income as dividends compared to most other types of companies?

Quiz

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