Buying shares in real estate companies can give you the same benefits as investing in real property. You could be earning passive income from rental revenue and capital gains without hammering a nail.
Real estate stocks give you exposure to companies that develop and manage commercial, residential and industrial properties. These companies share a piece of the action with you through publicly-traded real estate investment trusts (REITs).
Like any other stock, you trade REITs in the open market. These real estate stocks provide a low-cost way of sharing in real estate revenue and gains. There are other stocks that provide exposure to the real estate market. Nevertheless, the publicly-traded REITs category dominates real estate stocks.
The following list of top real estate stocks reflects this.
Overview: Real Estate Stocks
As a means of including the average investor into the lucrative real estate market, the U.S. Congress passed the Real Estate Investment Act in 1960. The bill’s sponsors wanted to duplicate the success of the mutual fund industry as a way of attracting capital to the real estate industry. So, they used the mutual fund equity structure to design a mutual fund for real estate. This became a means for people without much investment capital to benefit from the real estate market.
Although REITs had been around for over 30 years, these funds did not become popular until the credit crunch hit in 1992 or so. The hotel industry, in particular, turned to REITs as a source of financing when the banks turned them away. Residential and industrial divisions soon followed the commercial real estate industry. By the end of 2001, REITs had become the No.1 institutional source of real estate capital with equity of $146 billion — or 39% of capital sources.
By law, REITs must distribute 90% of net income to the shareholders in the form of dividends. The dividend revenue comes from rental income and capital gains. Publicly traded REITs typically have higher dividend yields than other equity investments. Since you can easily trade REITs, you can tap in into this reliable real estate income source without losing your investment’s liquidity.
Best Online Brokers for Real Estate Stock
Online brokers can simplify the process of trading real estate stocks. You’ll be able to thoroughly research your investment options, make smooth trade and keep track of your portfolio in one central space.
Features to Look for in Real Estate Stock
- Earnings growth: The key earnings indicator of real estate stocks is the funds from operations (FFOs). You calculate the FFO by subtracting the gains from the sales of property from the net income and adding depreciation and amortization. The FFO per share is your dividend yield. Ideally, a company should show a gradual increase in this metric. You can find a real estate company’s FFO history in the quarterly income report on the company’s website. The 4th quarter report also has year-end totals.
- Management team: A good management team is imperative to the consistent operation of a real estate company. Poor management can result in cost overruns and sluggish rental income. In the company’s income report, you can use the cash flow summary to get some insight into the management’s operating, investing and financing activities. While you are on the company’s website, take a look at the executive profiles.
- Diversification: Before you decide to buy a real estate company’s stock, take a look at its basket of properties. Are the properties in the same area? Does the company provide only one or two services? Be careful. Real Estate companies with a narrow reach may lack diversification, leaving them subject to the same risk factors such as hurricanes, service specific restrictions or local strife.
Significance of Investing in Real Estate Stocks
Real estate stocks in the form of REITs present an investment opportunity for you to earn better-than-average income without assuming much risk or losing liquidity from your investment capital. The 5 real estate stocks we have highlighted are an elite group in this sector.