The real estate market is sometimes characterized by unstable behavior. There is an increased demand for real estate properties in the face of limited supply. Prices often soar to high levels at this time. Speculators enter the market, further driving the demand. This state is called a real estate bubble. At one point of time, supply increases and demand decreases. The prices then come down automatically and the bubble deflates. A real estate bubble is not good for buyers as it results in losses. Buyers end up paying more for a property than it’s worth and end up selling for less. So buyers have to learn how to sense a bubble. Here are 5 signs of one as reviewed by DC Fawcett.
- Interest rates When interest rates are lowered, the demand for properties increases. This results in a bubble. Buyers have to look out for a reduction in interest rates. When the interest rates rise even by 1%, the demand comes down and the bubble bursts.
- There is lots of leverage When you take a long-term financing loan, you are actually leveraging your money. The more you pay down cash, the less you are leveraging your money. When the demand for houses increase and the prices soar, there will be more leveraging of money. This increased leverage may be a sign of a bubble as generally in the United States, 45% of transactions are made by paying down cash.
- Prices of houses soar faster than salaries When home prices escalate faster than incomes, then there can be a fizz in the local market. Investors must watch out for this sign. They can consult real estate agents regarding this. Some real estate agents calculate the average income level and employment level and compare it with the price rise for instability.
- Reduction in foreign demand Reduction in foreign demand slows down the international market. Due to decrease in foreign demand, international market prices will soar and this can be a bubble.
- Risky loans
When risky loans are lent, it may be a sign of a bubble. When the market prices soar, more loans are borrowed. An increase in subprime loans and loans with bad credit can be seen during times of bubble.
It’s difficult to identify bubbles. It does not mean that there is a bubble just because there is a price appreciation. A bubble is said to have occurred when there is a price appreciation without the support of factors that drive the value of real estate property. For example: San Fransisco, California is not in a bubble just because prices are high. However these 5 signs towards identifying a bubble have to be watched out for.
REIT ( Real Estate Investment Trust ) is an organization or a company which either owns or finances income-generating real estate. Investors get all types of regular income streams, diversification, and long-term capital appreciation from the REIT. These companies pay the taxable income to the shareholders by way of dividend, for which the shareholders have to pay the tax on dividend income. DC Fawcett suggests the investors to choose the right REIT.
REIT’s are known as total return investments. They provide high dividends and potential for moderate, long-term capital appreciations. They offer
High Dividend Yield
The dividend yield in a REIT is significantly higher than other equities.
Income and long-term growth
REIT provides long term returns apart from the returns from other stocks and bonds
Publicly traded REIT shares can be readily converted into cash as the trading is done in major stock exchanges.
How to choose REIT’s and their financial benefits
An individual might invest in a REIT that is listed on the stock-exchange. They also go to REIT mutual fund or exchange-traded fund. Profitable investment Investors also have the capacity to invest in public non-listed non REITs and private non REITs.
REIT stocks and shares are publicly priced in stock exchange- listed REIT’s like other companies. To assess the investment value of REIT shares, certain aspects are taken into consideration.
- Anticipated Growth in EPS(Earning per share)
- Anticipated total return from stock that is estimated from the price change and the dividend yield.
- Current dividend yields of bonds, utility stocks and other high-income investments.
- Percentage of dividend payout ratios.
- Management quality and corporate structure
REIT’s financial benefits
What is the benefit you get into investing in REIT
The market rewards the companies that consistently pay the dividend and has a growth in earning-per-share ratio and stock valuation metric. You need to make sure that
- The company has the ability to increase its earnings unfailingly.
- REIT management teams are able to reinvest the cash flow quickly and effectively while simultaneously developing other strategies to create new revenue opportunities.
- Strong operating characteristics that uses the strategies for succeeding in competitive markets like effective corporate governance procedures, conservative leverage, acceptable accounting practices and strong tenant relationships.
Earning measurements and ability to pay dividends
You need to compare the amount of dividend for the previous and the current quarter and assess how much the company growth has improved in REIT earnings, which are generated by higher revenues, lower costs, and new business opportunities.
REIT role play in retirement savings
REIT’s are the main aspect when it comes to an investment portfolio and retirement savings. The REIT’s should pay at least 90% of their taxable income to the shareholders by means of dividend, making them a strong income-generating investment.
In the last decade, investors, who has been investing in commercial real estate has switched on to REIT because of its attractive offers.
Shops, commercial buildings, industries, retail, wholesale, warehouses, hotels and educational institutions come under the commercial property. You can either buy the property directly or indirectly by investing in property companies, developers, house builders or even in funds. However, as a beginner, it might be a daunting task id you don’t have enough funds or have a bad credit. DC Fawcett suggests the best ways for the starters to invest in commercial real estate.
Best Way of investing in commercial real estate investment for beginners
There are so many factors to consider before you think about starting to invest in commercial real estate. One of the main factors is budget and location. Prices for commercial building or complex vary according to the location and area. One of the ways is to ask a professional real estate agent about investing in commercial property. If you are looking to invest in commercial real estate as a beginner, following are the ways.Real estate rating.
Learn what the insiders know
To be a professional in this trade, you need to think as a professional and take tips from the people who are experienced. You need to know that commercial property is different from the residential property. Even to avail the loan, you make at least 30% down-payment to the commercial property lenders.
Map out an action plan
The top real estate professionals are able to make out whether the deal is good enough. They make use of exit strategy, i.e. they know what deals they should accept and what not.
Get familiar with key commercial real estate metrics – It consists of:
NOI (Net Operating Income)
– The commercial property’s NOI is calculated by evaluating the property’s first year’s gross operating income and deducting the operating expenses for the first year
Cap rates – Real estate cap or capitalization is used to calculate the net present value of income generating assets.
Cash-on-cash – Most of the commercial real estate investors rely on financing to purchase properties abide to cash-on-cash strategy in order to compare first-year performance on commercial properties. This approach takes that the investor does not pay 100% cash for the property on one go and won’t keep all the NOI if they have other commitments like paying the mortgage loans. To uncover cash-on-cash, you need to calculate the amount required and stick to your budget
Look for motivated sellers
Like any other business, the customers’ drives real estate too. You need to find the sellers, who are ready and eager to sell below the market value. Nothing happens or matters in real estate till you find a motivated seller.
Study the neighborhood
To evaluate the commercial property, you need to study the neighborhood, where it is located in by going to their houses, talking to other neighborhood houses, and looking for the vacancies.
Apart from finding and evaluating commercial properties, getting a great price and communication, you need to build a good relationship and rapport with the homeowners.