Useful Cheatsheets
Grow / Finance / Investing

Investing in REITs

Evaluate real estate investment trusts using Funds From Operations, net asset value discounts, and property sector dynamics.

TL;DR

  1. Evaluate real estate trusts using Funds-From-Operations rather than net income.
  2. Capitalize on statutory 90-percent-distribution rules for high dividend yields.
  3. Hold high-yielding REITs inside tax-advantaged IRAs to avoid income taxes.
Jump to section

REIT Structure And Tax Mechanics

    The 90% Distribution Rule

    REITs must distribute 90% of taxable income to eliminate corporate taxes.

    Set the 90% distribution rule to taxable income times 0.90.
    Taxable Pass-Through Treatment

    Dividends flow through untaxed at corporate level to shareholders.

    Set taxable pass-through treatment to 0.00.
    Section 199A Deduction

    Taxpayers may deduct up to 20% of qualified REIT dividend income.

    Set section 199 a deduction to reit dividend times 0.80.

Core REIT Financial Metrics

    Funds From Operations (FFO)

    Net income plus real estate depreciation minus asset sale gains.

    Set funds from operations (ffo) to net income plus real estate depreciation minus gains.
    Adjusted FFO (AFFO)

    FFO minus recurring maintenance capital expenditures.

    Set adjusted ffo (affo) to ffo minus maintenance capex.
    Net Asset Value (NAV)

    Private market value of physical property assets minus debt.

    Private market value of physical property assets minus debt.

Property Sectors And Dynamics

    Industrial Warehouses

    Logistics facilities driven by secular e-commerce expansion.

    Logistics facilities driven by secular e-commerce expansion.
    Data Centers And Towers

    Essential digital infrastructure housing cloud computing and 5G.

    Essential digital infrastructure housing cloud computing and 5G.
    Residential Apartments

    Multi-family housing with annual lease resets tracking inflation.

    Multi-family housing with annual lease resets tracking inflation.

Macro Interest Rate Sensitivity

    Cost of Capital Impact

    Rising bond yields increase debt refinancing costs for acquisitions.

    Set cost of capital impact to new debt rate minus existing debt rate.
    Yield Competition

    When Treasury yields rise, REIT valuations compress to offer yield spreads.

    Set yield competition to treasury yield plus 0.02.
    Capitalization Rate Spreads

    Cap rates adjust upward in response to higher base borrowing rates.

    Set capitalization rate spreads to net operating income divided by property value.

Tips

  1. Always evaluate REIT dividend coverage using AFFO-payout-ratio to ensure maintenance capital expenditures are fully accounted for.
  2. Diversify capital across diverse specialized REIT-property-sectors including telecommunication cell towers, healthcare facilities, self-storage, industrial warehouses, and residential apartments.

Warnings

  1. Beware of rising interest-rate environments which increase REIT borrowing costs and make fixed income yields more competitive.
  2. Avoid high-dividend mortgage mREITs that employ extreme leverage to trade mortgage-backed securities rather than real property.

In Practice

FAQ