Real Estate Flashcards
Real Estate Investment Trust
REITs lease space and collect rent on real estate. mREITs don’t own real estate directly but they invest in a portfolio of real estate securities and other financial assets.
To qualify,
1) must pay out 90% of taxable income to shareholders and most pay out 100% which results in above-average dividends in exchange for income tax payments
2) 75% income from real estate-related assets
3) <10% ownership per shareholder
4) structured like a corporation but is not taxed like one
Property tends to be a long term investment as it has a lower correlation to trends that impact stocks and bonds
Real Estate Risks
1) Sensitive to rising interest rate risk
When interest rates rise, capital becomes tight, capital providers lend less > reducing supply > higher property values
2) Prepayment risk impacting yield
3) extension risk if payments slow down.
4) Cyclicality depending on industry type (hospitality)
5) Low credit quality tenants
Agency RMBS
Agency securities are fixed-rate or adjustable-rate mortgages for family-owned homes where the principal and interest are guaranteed by a US Gov’t agency or US gov’t sponsored entity
Agency CMBS
underlying mortgage loans are secured by real property other than single family residences, come with pre-payment protection
Fannie, Ginnie, Freddie
Ginnie - government mortgage operated through a US agency
Fannie - commercial banks - publicly traded company
Freddie - home mortgage loans from smaller banks/lenders - publicly traded company
Buy mortgages and creates pools of $1mm or more, issue to financial institutions
Agency Bonds
securities that are issued by government-owned/sponsored agencies. Investors make a return from monthly interest and when the mortgages are repaid.
1) Low interest rates on loans
2) Have low capital requirements
3) High return than treasury securities
4) Generally exempt from taxes
