What Is a REIT's Value?
In a time where the housing market is volatile, investing in real estate can be a scary prospect. However, there are more investment options than just buying a home. REITs provide an excellent opportunity for investors. Before you open your wallet, you may want to find out more about REITs and how they are valued.
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REIT Definition
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REIT is an acronym that stands for real estate investment trust. A REIT is a company that invests in real estate that is income-producing. To qualify as a REIT, the company's assets and income must be related to real estate investment. Also, the REIT must distribute via dividends at least 90 percent of its taxable income to the owners (i.e., shareholders) of the REIT. An example of a REIT could be a company formed to run and rent out an apartment complex.
REIT Value
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A REIT's value is the dollar amount determined to be the fair market value of the company. To learn what a particular REIT is worth, there are three main valuation methodologies typically employed. The methods are the discounted cash flow method, book value method and cap rate or yield method.
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Methods
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The first method of valuing a REIT is the discounted cash flow method. Using a discounted cash flow analysis, you assume that your company would grow at a certain percentage. You choose this percentage based on performance of similar companies and other growth factors. You then apply this percentage growth to your cash flows for a specified time period. Using a present value discount tool, you then discount these projected cash flows at a proper interest rate. This is your REIT's value.
The second method typically used to value a REIT is the book value method. This method values the REIT as the sum of the book values of each of the REIT's income-producing properties. The book value is determined to be the amount of the individual property's most recent valuation minus any liabilities associated with that property.
The final method is the cap rate or yield method. This method takes the income that the REIT is receiving from the income-producing properties it owns and capitalizes it at an appropriate yield rate.
Learn More
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REITs are complicated and will require careful thought and research before investing. To find out more about REITs in general, the National Association of Real Estate Investment Trusts is an excellent resource. Also, many large REITs are publicly traded and more information is available through stock investing firms. There are opportunities to purchase stock in a REIT via the New York Stock Exchange. To find out more about the options you have, contact your accountant or investment portfolio manager.
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References
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