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When I talk to people about owning REITs, I find that there are two types of people: those who ask me where Amazon closed today to change the subject, and those who get it and already own a bunch of REITs.
In most cases, most of the second class of folks are either related to me, or have been associated with me for years.
Warren Buffett once said that when it comes to value investing – you either get it, or you don't.
When it comes to owning REITs at bargain prices, most people just plainly don't get it at all.
Do yourself a favor- take a look at the Forbes 400 and look how many of these vast fortunes were generated by real estate projects of one sort of another.
Consider the richest guys in your town. Now ask yourself, "How many of them made their cash in the real estate game?"
Real estate properly purchased and managed is responsible for countless fortunes, and I can show you how.
Do as the Millionaires Do
Most of your run-of-the-mill millionaires got there because of real estate, running a successful business, or some combination of the two.
There's a group called TIGER 21 that is made up of about 700 people with at least $10 million in investable assets.
They share their asset allocations with the world-at-large every three months and take a guess which asset classes are the most heavily owned by these well to do guys and gals…
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It's real estate followed closely by private equity- a subject I've talked about before and I promise you we will do so again, soon.
Real estate builds fortunes, plain and simple. What REITs do is allow you to own real estate and also have it managed by professionals.
If they screw up, you can fire them in seconds and move on to the next opportunity.
If the markets get frothy, you don't need to hire a broker or begin a lengthy sales process. All you have to do is click a button and get your cash quickly.
The Secret to Getting Ahead with REITs
There are two key factors that you need to focus on to make money in REITs and real estate value.
The first is Free Cash Flow (FCF).
To figure that out, start by figuring how much money is left after you collect the rents, pay the bills, and salaries of your staff. Next, subtract maintenance costs, the mortgages, interest on any other debt. Now, pay your taxes.
What's leftover – that's free cash flow.
If our project or REIT does not produce free cash flow- and there is not a concrete plan to do so soon- then this may not be a great purchase.
I like to see free cash flow and lots of it. You should, too.
The next is the Net Asset Value (NAV).
Figuring this out is also straight-forward.
Based on rents, locations, occupancy levels, balance sheet quality, and – yes – the amount of aforementioned free cash flow produced by the property… how much is the property worth?
Now how much is left after I pay off any debt associated with the properties?
That amount is the net asset value.
Armed with these two numbers, you then need to ask yourself, "Can I buy this collection of real estate for less than the asset value, right now?"
Buying good properties at great prices relative to their asset value are how you get rich in real estate, or make a fortune in REITs.
Building the Foundation With REITs
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of "Max Wealth" and Heatseekers.