Before Investing In An Apartment REIT
On the surface, investing in an apartment REIT may seem like a viable
alternative to buying your own multi family investment property. It is
certainly easier, but is it advisable?
I have been investing in apartment properties and commercial real
estate for over 13 years now. And when I say "investing" I mean I
buying and managing my own properties, not investing through REITs.
This hands on experience has given me some insights that may be of help
to you if you are considering and apartment REIT investment.
What Do REITs Do?
The main objective of an apartment real estate investment trust (or any
type of REIT for that matter) is to pass the cash flows of its assets
through to the trust owners or "unitholders". It is this cash flow that
is most attractive to investors like you and me. And it stands to
reason that the greater the amount of cash flow that is distributed to
unitholders, the greater demand there is to invest in the trust.
Unfortunately this scenario creates a dichotomy between maintaining
distribution rates (through maintaining or increasing cash flows from
the underlying assets) and maintaining
the actual physical condition of the underlying assets, ie
the apartment properties themselves.
Slowly Killing The Apartment REITs Golden Geese
The last thing the directors of an apartment REIT want to do is lower
the monthly distribution to its unitholders. This signals problems to
investors. Knowing this, the management will typically do everything in
its power to avoid this scenario.
How do they do it?
Like I alluded to above, all too often the physical condition of the
investment properties themselves are sacrificed in order to maintain
cash flows. In the short run this may not be a problem, or at least one
that is apparent to potential investors like you and I. But the
"downward spiral" as I call it has begun.
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ecourse that I recommend. And even if you don't buy it right away,
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I have seen this many times, and not just with apartment REITs.
Individual owners of income properties fall into the same trap all the
time. They constantly suck all the cash out of their properties that
they can in the short run, slowly killing the golden goose. The
condition of the property slowly deteriorates, the rents that can be
charged diminishes, the quality of the tenants is lowered and the
downward spiral begins.
At some point the owners wake up and see the problem, but usually it is
too late. Cash flows have dried up, and there is no money to improve
the physical presence of the property.
The usual solution? SELL FAST!
Opportunity For The Smart Real Estate Investor
This is typically where investors like myself step in. These types of
properties are ripe for the picking...
- a motivated seller
- undervalued asset
- opportunity to add value
These type of real estate investment opportunities are where you should
be focusing your efforts if you are considering investing in revenue
What Happens To An Apartment REIT In This
When the curtain is finally pulled back and investors see that the
"geese are dying" the price of the trust units will decline
accordingly. Depending on how bad things are, the REIT may be forced
(just like the individual owner) to sell off assets to survive. Again,
it is a downward spiral.
What To Look For In An Apartment REIT
Look closely at the operating statements of the REIT, not just the
distribution figures. Are the expense figures in line with industry
norms (typically in the 45% range)? If NOI's are running above 60% of
revenues, this may be a signal that too much cash is being sucked out
of the properties.
Should You Invest Directly In Apartment Buildings?
As I mentioned above, I have been investing in commercial real estate
for well over a decade. When done properly, these investments can
provide cash flows that you are unlikely to ever receive by investing
through an apartment REIT. Of course, investing directly requires much
more of a time commitment initially, and certainly requires a solid
understanding of apartment building investing.
As I mentioned above, if you would like to learn more about investing
in apartment buildings,
I would recommend that you consider a course written by a colleague of
mine entitled "How
To Buy Your First Apartment Building".
And if you are interested in staying in touch please feel free to sign
up for my newsletter. It's complimentary and I promise not to bombard
you with emails!
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