Certain metrics are needed to evaluate a commercial property investment company; a real estate investment trust, or REIT; a real estate sector fund; or just the stock of one particular company in the real estate sector.
Top Metrics for Assessing Real Estate Sector Equity Investments
If you are looking at specific companies or a mutual fund in the real estate sector, keep a keen eye on earnings and cash flow. These can be found in the financial statements. For a REIT, focus instead on funds from operations, or FFO. Most real estate investments are constantly pitting cash flows against depreciation costs. A company that can coordinate vendors for repairs and maintenance effectively reduces present and future upkeep costs. Properties also need to produce rent, unless they are being built and sold, so having locked-in mortgages or leases is critical.
The entire real estate sector is also vulnerable to interest rate fluctuations and general economic health. Renting is less attractive and buying is more attractive when interest rates are low; conversely, real estate companies are devastatingly dependent on the underlying value of their property portfolios. If property prices fall, companies struggle.
Real Estate Investing vs. Investing in a Real Estate Company
If you are looking for investment property, you need an entirely different set of analytical tools than those provided in this article. Investing in a particular property requires special knowledge of the local market, the property's condition, local ordinances and taxes, bank negotiations on the mortgage and possible property-specific cash flows.
Investing in the stock of a real estate company or REIT is very different. You need to be able to read financial statements and research/build accounting ratios. You need to be cognizant of macroeconomic factors, and lastly, you need to focus on someone else's management skills, not your own.