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These 10 REITs Gained Over 10% In 2018

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Real Estate Investment Trusts (REITs) continue to remain popular among investors. Over 90% of REITs have higher dividend yields compared to the average S&P 500 company.

Similar to stocks, REITs need to be held over a long period of time for them to generate substantial returns. Here are 10 REITs that gained 10% in 2018.

1. Arbor Realty Trust [ABR]

Arbor Realty Trust [ABR] is a REIT that engages in the provision of loan origination and servicing across senior housing, healthcare, multifamily, and commercial asset verticals.

ABR has a market cap of $2.4B and has gained over 50% in 2018, primarily driven by robust sales and earnings growth — which no doubt puts a smile on CEO Ivan Kaufman’s face.

Dividend Yield: 9.5%

Total Gain: $800M

CY 2018 Return: 50%

2. Apollo Commercial Real Estate Finance [ARI]

A mortgage REIT, ARI acquires and invests in commercial real estate mortgage loans, subordinate financings, and other real-estate debt instruments. ARI has a market cap of $2.4B and has gained 10.3% in 2018.

Even better, ARI beat analyst estimates in two of the last four quarters.

Dividend Yield: 9.5%

Total Gain: $225M

CY 2018 Return: 10.3%

3. Blackstone Mortgage Trust [BXMT]

The Blackstone Mortgage Trust engages in originating senior loans collateralized by commercial real estate. This REIT aims to protect shareholder value and produce risk-adjusted returns through dividends.

BXMT has a market cap of $4B and has gained close to 11% in 2018. The share price has enjoyed an upward climb as BXMT managed to beat earnings estimates coupled with robust revenue growth.

Dividend Yield: 7.2%

Total Gain: $360M

CY 2018 Return: 10.8%

4. Chesapeake Lodging Trust [CHSP]

The Chesapeake Lodging Trust manages and operates hotels. It has an enviable portfolio including The Royal Palm, Hyatt Regency, Le Meridien, JW Marriott, Hotel Adagio, Ace Hotel, Hilton Checkers, Homewood Suites, and Hotel Indigo.

In July 2018, CHSP closed the sale on the Hyatt Centric Santa Barbara which is a 200-room hotel for $90M.

CHSP has a market cap of close to $2B and this REIT has gained 24.2% in 2018.

Dividend Yield: 4.8%

Total Gain: $380M

CY 2018 Return: 24.2%

5. CyrusOne [CONE]

CyrusOne owns, develops and operates multi-tenant data center properties. This REIT provides data center facilities to ensure continuous operations of IT infrastructure companies.

CONE has a market cap of $6.4B and has risen 15% in 2018. Last month, CONE closed the $440M purchase of Europe-based Zenium Data Centers. This expansion into Europe is expected to positively impact revenue for CONE.

Analysts expect CONE’s revenue to grow 22.4% in 2018 and 19% in 2019.

Dividend Yield: 2.8%

Total Gain: $830M

CY 2018 Return: 15%

6. Digital Realty Trust [DLR]

Digital Realty Trust owns, acquires and manages technology-related real estate. It provides data centers, colocation, and interconnection solutions. DLR is one of the largest REIT companies with a market cap of $26.4B.

DLR has gained close to 11% in 2018 and is expected to benefit from the global boom in cloud capital spending.

Dividend Yield: 3.3%

Total Gain: $2.4B

CY 2018 Return: 10.9%

7. Education Realty Trust [EDR]

Education Realty Trust focuses on the acquisition and development of housing communities near university campuses.

It has a market cap of $3.3B and has risen 21.5% in 2018. EDR has an impressive earnings history that has driven shares of the REIT upwards. In fact, EDR has beaten earnings estimates by 270% in Q2 2018, 121% in Q1 2018, 28% in Q4 2017 and 80% in Q3 2017.

Dividend Yield: 3.8%

Total Gain: $591M

CY 2018 Return: 21.5%

8. EastGroup Properties [EGP]

EastGroup Properties [EGP] acquires and operates industrial properties in the United States. Its portfolio consists of distribution facilities in Florida, California, Texas, Arizona, and North Carolina.

EGP has a market cap of $3.45B and has risen 11.1% in 2018. Large dividend payouts from REITs continue to entice investors and EGP raised dividends by 12.5% in its latest quarter. EGP has in fact increased dividends for seven consecutive years now.

Dividend Yield: 2.6%

Total Gain: $341M

CY 2018 Return: 11.1%

9. EPR Properties [EPR]

EPR Properties is involved in the development and leasing of theatres and entertainment centers. With a market cap of $5.2B, EPS has risen almost 12% in 2018.

EPR’s revenue is estimated to rise 13.3% in 2018 and 5.4% in 2019. The stock is currently trading at $69.84 and the high analyst target estimate for EPR is $71.

Dividend Yield: 6.1%

Total Gain: $552M

CY 2018 Return: 12%

10. Granite Point Mortgage Trust [GPMT]

Granite Point Mortgage Trust focuses on originating, investing and managing senior commercial mortgage loans and other debt, such as commercial real estate investments. GPMT has a market cap of $828M and has risen 12.3% this year.

Similar to other REITs in this list, GPMT has benefitted from encouraging revenue growth in 2018. Analysts expect revenue to rise 24% in 2018 and 18.5% in 2019.

Dividend Yield: 8.3%

Total Gain: $155M

CY 2018 Return: 12.3%

Real Estate Investing

What is Debt Service Coverage Ratio and Why it’s Important?

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There are few numbers more important in commercial real estate than the debt service coverage ratio.

It’s one of the first things and one of the last things that any commercial lender or broker will talk about. It’s first and last because it’s simply that important!

A lot of people toss this term around without explaining it while others are using it without fully understanding it. It’s a lot more than just a simple formula and when you understand the debt coverage ratio, you’ll be able to control it to get maximum financing.

Let’s dive into it.

Why the DSCR is Important

Imagine finding a commercial property worth $400,000 and you need to put 25% down.

You think, “alright, I can afford that!” and move forward with the deal, expecting $300,000 in loan proceeds.

As you approach closing, your mortgage lender calls you to say “The maximum loan we can give you is $225,000 because the debt coverage ratio is too low.”

Now what do you do?

This is real and happens every day. To avoid a situation like this, you need to fully understand the debt service coverage ratio before you make offers.

The fact is that it’s regularly used by banks and loan officers to determine if a loan should be made and what the maximum loan should be. If you don’t have the extra money laying around, you won’t be able to close the deal and you’ll lose a lot of money.

Debt Service Coverage Ratio Defined

The debt coverage ratio is a simple ratio that tells a lender how much of your cash flow is use to cover the mortgage payment. It’s known as the debt service coverage ratio, debt coverage ratio, DSCR, or DCR.

Debt Service Coverage Ratio Calculation

In general, it’s calculated as:

Debt Coverage Ratio

where:

Net Operating Income = Gross Income – Total Operating Costs

Debt Service = Principal + Interest

To calculate the debt coverage ratio of a property, first, you need to calculate the NOI. To do this, take the total income, subtract any vacancy, and also deduct all operating costs.

Remember, operating costs do not include debt service (principal and interest), or capital expenditures. Insurance and taxes are operating costs, so don’t forget to include them.

Next, take the Net Operating Income and divide it by the annual debt service, which is the sum of all principal and interest payments during the year.

To do this you must take the entity’s total income and deduct any vacancy amounts and all operating expenses. Then take the net operating income and divide it by the property’s annual debt service, which is the total amount of all interest and principal paid on all of the property’s loans throughout the year.

How The Debt Ratio is Used

A Debt Coverage Ratio below 1 means the property does not generate enough revenue to cover the debt service while a debt ratio over 1 means the property should, in theory, generate enough revenue to pay all debts.

It’s very common for lenders to require a 1.2 DSCR, give or take.

If your debt coverage ratio is too low, the only way to make it work out better is to reduce the loan balance. Your NOI is the same but now your principal an interest decreases, making the ratio go up.

And that’s how you can get your loan proceeds cut dramatically.

Debt Coverage Ratio Example

Let’s say there is a property that generates $10,000 in revenue, has total operating costs of $4,800, and yearly debt service of $4,000

NOI = $10,000 – $4,800 = $5,200

Debt Coverage Ratio

In this example, the debt coverage ratio is above 1.2, so this would be a good risk for the bank and they’d likely give the loan.

Let’s say that interest rates change and the bank gives a slightly higher rate, causing a new debt service of $4,500.

DSCR

Notice how a small change can suddenly change everything!

The Bank Will Reduce Your Loan

Image result for bank loan

In this situation, the bank probably won’t reject the loan. Instead, they will reduce the loan balance until the payment comes in line with their minimum DSCR requirements.

In this situation, the lender will simply reverse the formula and determine what the maximum debt service can be. We can plug in the variables we know to solve for the allowable debt service

1.2 = $5,200 / Max Debt Service

Max Debt Service = $5,200 / 1.2

So, the maximum debt service can be $4,333. Now they just need to figure out what loan balance that will be based on their interest rate and loan term.

…and you’ll be stuck trying to squeeze some quarters out of your couch to pay for the extra down payment.

How the Debt Ratio Affects Returns

In the example above I showed how a loan can be adjusted down before the lender will give the loan. This can significantly reduce your cash on cash returns.

Let’s say you are buying a property in the example above costs $100,000 and requires a down payment of $25,000.

Let’s also say that it generates $10,000 in cash each year and has an NOI of $5,200.

Originally the debt service was supposed to be $4,000 per year, leaving $1,200 in total cash flow.

Now, let’s calculate our cash on cash return. We know that it’s calculated as:

Cash on Cash Return =  Total Cash Flow / Total Cash Invested

CoC = $1,200 / $25,000 = 4.8%

This means that for every $100 you invested, you get back $4.8 every year, cash in the bank. This is not to be confused with the overall return on investment.

But due to some fluke, the terms changed and now the debt service will increase. Let’s say that the interest rates increase so your $75,000 loan is at 4.5% now and your debt service goes up from $4,000 per year to roughly $4,560/year. You can see that the new debt service coverage ratio is well below the 1.2 minimum.

I’ll spare you the math, but when I punch it into a calculator I find that the maximum loan value is now roughly $71,000. This creates a yearly debt service of $4,320, bringing you back to 1.2

Comparing The Two Scenarios

Since you’re loan has gone down, you will need to invest an extra $4,000. You’ll also have a lower cash flow because of the higher debt service.

Cash Flow = $5,200 – $4,320 = 880.

Now let’s compare two scenarios. Imagine if you were still able to get 25% down, your cash on cash would look like:

CoC = $880 / $25,000 = 3.5%

Not very good, right? But, that’s because of the increased interest rates.

Now, let’s see how the change in the loan amount affects your return. Remember, your down payment is no longer $25k because it became $29k.

CoC = $880 / $29,000 = 3.03%

Even worse…

Never Neglect the Debt Coverage Ratio

You can see how important this simple ratio is to banks. It can change your returns, your down payment requirements, and it can even kill your deal.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

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Real Estate Investing

How To Put That Extra Space In Your Property To Good Use

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A lot of investment properties have something we call bonus space.

It’s space that isn’t quite a bedroom, maybe not really living space, but doesn’t have any one specific use.

So, how do you use this space to create value for your investment property?

Well, that depends…

Can It Become A Bedroom?

A bedroom is almost always going to be the highest value use of any bonus area, so let’s try that first. So, it’s time to look up your local health/building codes to determine the requirements for a bedroom.

The International Residential Code, which most states follow, has several requirements to be considered a bedroom. States and municipalities are free to add on top of this, and some areas don’t use the IRC as their code.

Most places have a square footage requirement and also require a window and a closet. But, different states/municipalities may have different requirements so look them up.

Note About Egresses

Basements and Attics are notoriously bad places to be during a fire. There may be requirements for additional egresses for any living space that is in these two areas. Make sure you know all of the requirements before trying to make a bedroom.

Once you know the requirements, you can determine if a simple project can convert this random bonus space can be used as a bedroom.

For example, if it just needs a larger window, simply hire someone to install it. If you need a closet, get one put in.

It becomes more challenging if you need another egress added to a basement though.

It Can’t Be A Bedroom, Now What?

Most bonus space can’t be used as a bedroom, so don’t feel bad about that. The next thing is to figure out exactly what you can do with the space.

Determine What Kind Of Space You Have

The first step is to figure out exactly what you’re working with and what it can look like when you’re finished.

Regardless if it’s in an attic, basement, porch area, or whatever, it’ll need to be finished with drywall, paint, floors, lights, and heat/ac. Your bonus space probably has some of these already, but often not all.

Keep in Mind The Location

Basements are usually cool and damp, so you may need extra heat during the winter and a dehumidifier in the summer.

Attics are really hot, so you’ll need to add extra air conditioner. Also, you need to make sure your roof is ventilated properly before completely finishing an attic so take that into consideration before adding drywall to the rafters.

Every area will have it’s own unique considerations before starting the project.

Figure Out Its Highest and Best Use

This is really open to interpretation, but you need to figure out it’s best use for other people.

The best thing to do is to look at comparable sales in your market area. Look at what most other people are putting into their properties, then just copy them.

Here are a few common ways people use their bonus space

Den Or Media Room

The most common way people use their extra space is by using it as a second living room, den, or media room. These are all different words for similar things.

Basically, one living room will be a bit more formal for having guests over. The den or media room will be for watching TV or movies mostly.

If you are outfitting a room for this use, it might be beneficial to install speaker wires around the room (this is very cheap), and make sure there is cable and internet hookups.

Game Room

If your investment property already has an area dedicated as a den, you might want to consider outfitting it as a game room.

A Game Room is a room in the house for relaxing or socializing. It is typically furnished with a Pool TablePing Pong TableDart Area, or other recreational amenities.

Storage

A lot of people just need extra space for storage. Having a clean and dry area to toss junk is the lowest value use, but still important. Having this finished space will most likely make it more valuable anyhow.

Advertising Bonus Space

The next step is to advertise your bonus space. You’re either listing this property for sale, or listing it for rent (it’s an investment property, right?).

It’s important to bring attention to the bonus space, especially if it’s not listed in the square footage or other information about the property. This is really common for basements and attics.

In this situation, bring attention to it and make people image what they could use it for, but don’t specifically say it can be used for things that it shouldn’t be used as (such as a bedroom). People will often use the space however they want, including as a bedroom, but you should not encourage this if it’s not a legal bedroom.

So, you’d could potentially say something like:

There is an extra 400 square feet of finished bonus space in the attic that could be a game room for you and your friends, media room for late night movies, or whatever else you can imagine! It is heated, cooled, and has everything you need to enjoy it day and night all year long.

But you’d never want to say something like

There is an extra 300 square feet of finish bonus space in the basement that could be used as a media room, den, game room, or even an extra bedroom when friends come visit.

…assuming the bedroom is not legally a bedroom in your jurisdiction.

Charging For The Space

It’s hard to say what bonus space is worth, but it’s worth something.

The only way to figure it out is to try to sell it or rent it out, and see what the market will give you.

This article originally appeared on IdealREI.  Follow them on FacebookInstagram and Twitter.

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Real Estate Investing

10 Mistakes Homebuyers Must Avoid At All Costs

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Buying your home can be quite daunting, and if done wrong, it can bring with it enough financial regrets for the homebuyer. Here are 10 mistakes to avoid when buying your home.

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