Along with real estate crowdfunding, I regularly invest in Real Estate Investment Trusts (REITs), which are companies that solely derive income from property investments. In this article, I will share how I select the best REITs for my digital property portfolio.
We will see that even if REITs share a lot of common features with other dividend paying stocks, they have their own specificities as it’s also a way to invest in property. We will see the different criteria that I use for my own portfolio when investing in a REIT. Let’s dive in!
The first thing I do when selecting a REIT is quite similar to what I would do with any dividend paying stock: look at the dividend yield & dividend history.
You first have the dividend yield. This is the current annual yield of the investment. Usually, the yield of a REIT will be higher than other dividend paying stocks, as a REIT needs to distribute most of its profits as dividends. I usually look for REITs with yields around 5 or 6%, which are a bit lower than my other real estate investments.
Then, I look at the REIT dividend history. This is really important, as you want to invest in a REIT that has a good history of paying dividends. What is even more important is that the REIT has growing dividends over time, meaning that the company cares about its shareholders, and also that the dividend payouts will keep up with inflation.
Just as with any other investment in a business, I then look at the financials of the company. You can look at the usual gross revenue, expenses and profits, but for a REIT there is another metric that is more important than profits: the funds from operations, or FFO.
Indeed, as a company deriving most of their profits from real estate, a REIT will usually count depreciation and amortisation of their portfolio to their earnings, meaning a lower profit on the balance sheet. But what we really want to look at is their funds from operations, which is the ‘real’ cash flow of the company obtained by adding depreciation & amortisation to their earnings. This is the metric that I look at when selecting a REIT, and comparing REITs between each other.
Next, I look at the type of property that is owned by the REIT I want to invest in. Indeed, investing in REITs is a fantastic way to diversify your property portfolio in sectors that wouldn’t be accessible to you otherwise, like healthcare real estate, or large retail properties like shopping malls.
I also like to use REITs to invest in really specialised real estate, like I did with a company called DLR (Digital Realty Trust Inc), which is a company that invest in real estate dedicated to hosting computer servers. I think is a very good sector that will have a strong growth in the future, and unless you have millions of dollars to invest, this kind of investment is only accessible via a REIT.
I also look at where the property portfolio of the REIT is located, to see if it can diversify my real estate investment portfolio geographically. Indeed, it’s really easy to invest abroad when using REITs: usually, you will have access to a wide selection of stock exchanges from the broker that you will use to invest in REITs. In a few clicks, you can invest virtually anywhere on the planet.
Therefore, even if most of my REITs investments are located in the US, I have some of them where I live at the moment (in Europe), but also in Hong Kong or Singapour. I really like to use REITs to diversify my portfolio all around the world, as it’s nowadays so easy to do so.
Finally, I wanted to end this article with another consideration when selecting REITs: what about REITs ETFs? As you might know, ETF stands for Exchange Traded Fund, which is a mutual fund composed of several positions, but that you can buy on the stock market just like another stock.
There are indeed ETFs out there that are solely composed of REITs. I have some in my portfolio, that I bought when I started investing in dividend paying stocks. However, I really recommend selecting good REITs yourself instead, rather than relying on an ETF that will have a wide selection of REITs inside it.
These were the criteria that I use personally when investing in REITs. What criteria do you use to select your REITs investments? Don’t hesitate to share below!