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Table of Contents
Choosing a Real Estate Investment ...................................................................................................................... 3 Think about why you're investing in real estate ............................................................................................ 3 General categories of real estate investments ............................................................................................. 4 Types of Real Estate Investments ......................................................................................................................... 7 Introduction ................................................................................................................................................... 7 Specific types of real estate investments ......................................................................................................7 Strategies for real estate ...............................................................................................................................8
Existing notes, loans, and mortgages Insurance policies and past claims Certificates of occupancy Maintenance and other service contracts Licenses and permits Deed Rental payment histories and credit files of existing tenants Financial records for the past three years, including income and expense statements Tax returns for the past three years Utility bills for the past three years Bank statements Litigation histories Past appraisals, engineering reports, surveys, etc. Inventory--furniture, fixtures, and supplies Further, investors in commercial real estate should also: Have the property surveyed, appraised, and inspected (engineering and environmental) by professionals Have an outside firm audit the financial statements Verify payment of past taxes Tip: Any purchase of commercial real estate should be contingent on the purchaser's satisfaction with the completeness and outcome of due diligence, and ample time for due diligence should be allowed. Unimproved land Buying unimproved land for its development potential is highly speculative. If you're interested in a specific piece of property, be sure to factor the property taxes you'll pay into your calculations of the potential return on your investment. If you're counting on nearby development to increase your land's value, remember that a change in the economic climate can affect not only commercial development but government priorities and funding for infrastructure projects such as roads, sewer and water lines. Zoning issues may also be a factor. Real estate investment trusts (REITs) A real estate investment trust (REIT) is a real estate investment company that is publicly traded on one of the stock exchanges. Many investors find REITs attractive because they must distribute 90 percent of their net income as dividends to shareholders. Thus, when analyzing a REIT, an investor should ascertain the company's dividend rate and dividend-paying ability. Also, keep in mind that the income potential depends upon income derived from the underlying property, and low occupancy rates will affect a REIT's return. The primary performance and valuation gauge for a REIT is funds from operations (FFO). FFO is net income plus depreciation and amortization plus extraordinary losses (or minus extraordinary gains). To determine the company's dividend rate, divide FFO per share by dividend per share. To ascertain safety, determine the company's dividend coverage ratio (DCR), which is calculated by dividing FFO per share by its current dividend. The higher the DCR, the more sustainable the current dividend.
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Think about whether you want an REIT that concentrates in one sector of real estate, such as office buildings, shopping malls or apartment buildings, or one that is more diversified or that has multiple sources of income. Real estate mutual funds and exchange-traded funds There are multiple ways to use mutual funds and exchange-traded funds to invest in real estate. A mutual fund may be actively managed, selecting specific real-estate developers' stocks or REITs in which to invest. Or it may simply invest according to an index of various REITS, as exchange-traded funds do. Popular real estate indexes include the Dow Jones Wilshire Real Estate Securities Index, the Dow Jones Wilshire Real Estate Investment Trust Index, the FTSE EPRA/NAREIT Global Real Estate Index, and the S&P/Citigroup Global REIT Index. In addition to these broad-based indexes, which can be used as a basis for comparing the performance of individual REITS or REIT funds, there also are regional indexes for various parts of the world. You should read the fund's prospectus (available from the fund) and carefully evaluate a real estate fund's expenses and fees, investment objective, holdings and performance before investing, just as you would any other fund. In addition, think about whether you want a closed-end mutual fund, which issues a fixed number of shares and may use leverage as part of its investing strategy, or a more traditional open-ended mutual fund, which issues shares continuously. Real estate limited partnerships Limited partnerships offer investors who do not have the expertise or time to select and manage investments on their own the ability to seek opportunities in real estate. Investors should carefully review the financial information contained in the offering documents, including fee structures. Additionally, because limited partners have no say in management, investors should research the credentials of the general partner, including his or her knowledge and experience, and willingness to keep the limited partners informed on the status of the partnership's holdings. The general partner should have a good track record. Review past deals to determine whether projections were met. Talk with current limited partners about the profits they have earned.
Rental property Rental property is distinct from vacation property. It typically refers to a dwelling (single-family or multi-family) that you purchase with the intention of renting out. Most real estate investments are growth oriented, meaning the return on your investment is based on how much your property increases in value from the time you purchase it until the time you sell it. However, when you purchase rental property (either residential or vacation), your focus will be on current income and cash flow. Although you may someday sell the property at a profit, the greater part of your return will likely come from rental income. For this reason, rental property is typically a long-term investment. Raw land Investing in raw land involves the purchase of unimproved property, often with the intent of building, leasing, or selling the land at a later date. Investing in raw land may be as simple as purchasing a single lot in a subdivision on which to build a home, or as complex as accumulating hundreds of unimproved acres to hold for future development and subdivision. Speculators often invest in raw land, acquiring tracts of land in anticipation of future rezoning. Regardless of your position and purpose, the success of an investment in raw land depends on a few important factors. Among these factors are the location and physical features of the property itself, the timing of the investment, the opportunity cost of the investment, and (in the case of a large-scale investment) whether the community and local governing bodies are supportive of the development.
JDG Wealth Management Group, LLC Disclosure: is a Registered Representative with and, securities are offered through LPL Financial, Member FINRA/SIPC
JDG Wealth Management Group, LLC Jamie D. Grant, CRPC Managing Principal 1250 E. Copeland Rd., Ste 540 Arlington, TX 76011 817-900-8455 jamie@grantwealthgroup.com www.grantwealthgroup.com
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