Building Wealth Through REITS (Expanded Edition)

by Bobby Jayaraman

Just as an investor buying a house uses some of his own savings (equity) and a loan from a bank (debt) to buy a house, a REIT raises money from investors (equity) and takes a loan from banks (debt) to fund its properties. The ratio of debt to the value of properties is called the “gearing” of the property. If it is high (this is subjective and will vary by REIT), the REIT is said to be highly geared or leveraged.

There are broadly two types of issues that concern a property investor. The first is the revenue-generating ability of the property which will enable the investor to achieve a good return on capital. The second is whether the investor’s finances (his personal balance sheet) are strong enough to withstand a prolonged downturn such that the investor can continue making mortgage payments to the bank.