A:

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.

RELATED FAQS
  1. How does the risk of investing in the real estate sector compare to the broader market?

    Learn about the high volatility of the real estate sector and how conservative investors gravitate toward real estate investment ... Read Answer >>
  2. What are the differences between investing in real estate and stocks?

    Invest in real estate by purchasing physical property or buildings, or invest in stocks by buying a claim to a company and ... Read Answer >>
  3. Why can real estate be a good addition to a traditional stock and bond portfolio?

    Discover why real estate can be a good addition to a traditional stock and bond portfolio. Real estate is affected by economic ... Read Answer >>
  4. The Role of an Asset Manager in the Real Estate Market

    Find out what role asset managers play in the real estate markets. Learn how real estate portfolios are selected and why ... Read Answer >>
  5. What is the difference between an Equity REIT and a Mortgage REIT?

    Find out more about real estate investment trusts and the main differences between equity and mortgage real estate investment ... Read Answer >>
Related Articles
  1. Investing

    A Guide to Real Estate Investing

    Investing in real estate is a popular choice for good reasons, but it's more complicated than owning your typical stocks and bonds.
  2. Investing

    Real Estate Vs. Stocks: Which One's Right For You?

    There are ups and downs for both real estate and stock investments, so before diving in, know the differences between the two.
  3. Investing

    Private Equity Real Estate Funds vs. REITs

    REITs and Private Equity Real Estate Funds are two different ways to invest in real estate.
  4. Investing

    A Look at REITs vs. Real Estate Mutual Funds (ESRT, TRREX)

    REITs and real estate mutual funds have their differences, yet they both offer liquidity and easy access to diversified real estate assets.
  5. Investing

    4 Key Factors That Drive the Real Estate Market

    Whether you are investing directly or indirectly in property, you need to know the factors that affect its value.
  6. Investing

    Can Real Estate Stabilize Your Portfolio?

    History suggests that real estate can provide diversification and a hedge against inflation.
  7. Investing

    Simple Ways to Invest in Real Estate

    Owning property isn't always easy, but there are plenty of perks. Here are some ways to invest in real estate.
  8. Investing

    Is Now A Good Time To Invest In Real Estate?

    From carrying costs to investment risk, there's a lot to consider before you invest in real estate.
  9. Investing

    Key Reasons To Invest In Real Estate

    There has been a lot of negativity over the real estate sector since 2008. Here are the reasons why you should be investing in it.
  10. Retirement

    Is Real Estate Your Retirement's Secret Weapon?

    With stocks maybe peaking and fixed-income investments paying less and less, real estate could be the growth opportunity for your retirement portfolio.
RELATED TERMS
  1. Commercial Real Estate

    Commercial real estate is property, typically leased out to tenants, ...
  2. Property Derivative

    A property derivative is a financial product that derives value ...
  3. List Price

    The list price, in the real estate world, is the suggested gross ...
  4. Private Equity Real Estate

    Private equity real estate is an asset class that consists of ...
  5. Investment Real Estate

    Real estate that generates income or is otherwise intended for ...
  6. Financial Management Rate Of Return - FMRR

    A metric used to evaluate the performance of a real estate investment ...
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  2. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  3. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  4. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  6. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
Trading Center