Real Estate Investment Options
Investing in real estate has gained a lot of popularity as a common investment vehicle. There are many real estate investment options like in public or private equities or in public or private debts. This article gives a fair idea of what these options entail. For the same, it is necessary to be conversant with a few terms that are explained below:
Real Estate Investment Trust (REIT)
It invests in real estate either directly or through properties /mortgages by selling like a stock on major exchanges.
When the owner is not able to repay the principal or interest payments or both on his home mortgage, as per the stipulated terms of the contract of the mortgage, the lender (bank/ society of the building) has the right to confiscate and sell his home. Such a situation is referred to as a foreclosure.
Commercial Mortgage-Backed Security (CMBS)
This is a category of securities that is backed by mortgage secured by a loan on a commercial property.
It is a part/ piece/ portion of a contract or structured financing.
How to Invest in Real Estate
- Through Public Equities- You can invest here in the same fashion as for buying a stock by informing the broker about the order and paying him the applicable commission. These involve real estate securities like companies that deal with publicly traded real estate or standard equity REITs. Here the underlying assets are real estate. There is a tendency of the investments that are traded on a stock exchange to show signs of patterns of returns just like those of equities. At a point in time when there is a valuation of the stock market of these securities, the value of the company varies with respect to the total of its underlying values of real estate because of parameters like sentiments of investors or the like. The advantage here is the relative ease with which the same can be done and there is the liquidity that one can get with such investments, by short-notice-selling in the market without delays; unlike that for a private market.
- Through Private Equity- Thorough research in the market for real estate brokers / dealers must be done for which foreclosure records, mortgage brokers, banks, etc. may come handy. The condition of the property to be invested in, the environmental factors, proper search and title reports, etc. must be carefully scrutinized. Investments made here are the most common and considered to be traditional and as a result it will be to your advantage if you build up a good reputation. Also, patience pays if you want the right type of investment. It also helps if you give priority to the location, tenant quality, state and configuration of the building and financial capability. Getting the right type of returns as per your investment needs could be the right deal that you have struck. Always consult your bank or broker for determining the mortgage type for finance if you need one.
- Through Public Debt- Example: Commercial mortgage-backed security or (CMBS). Here the lender accumulates a number of mortgage loans and sells them in tranches to the public market. The borrowers make repayments of their mortgage payments and these are combined to be paid to the owners of the debt securities as directed by the security, by third party rating service. An AAA rating is given for loans of high credit quality. It is worthwhile to note that the loan pool has different tranches; each with a distinctive type of risk and so having an exposure that is just needed for your investment portfolio is recommended.
- Through Private Debt- It is not commonly used. Here mortgage financing to a real estate owner must be provided. You can receive either a fixed or a floating rate of interest in exchange for your mortgage loan and also precedence on the real estate assets if there is a default on the loan.
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