How Exactly Do REIT Valuation Methods Work?

How Exactly Do REIT Valuation Methods Work?
How Exactly Do REIT Valuation Methods Work?
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Today, when it comes to choosing better decisions for investment portfolios, REIT is one important option to consider. In case you don’t know, “REIT” is an acronym for Real Estate Investment Trust. With REIT, you can always get high, stable annual dividends, including long-term capital appreciation. That said, Real Estate Analyst is one of the best real estate financial modeling courses you can enroll in to better understand how REIT investment works, including the different valuation methods you can employ to achieve the best results.

The rest of this post will help you understand the different REIT valuation methods, including why going for this Real Estate Analyst course is worth it.

3 Major REIT Valuation Methods

In real estate, REITs are securities that can be traded like regular stocks. Primarily, REITs are designed to help manage clusters of income-producing properties. One important regulation a company needs to meet to avoid liability for income tax is to distribute most of its REIT’s profits as dividends.

Today, the net asset value (NAV) is currently one of the most effective options for assessing your REIT value. Two other effective methods are the dividend discount model (DDM) and multiples & cap rates.

  • Dividend discount model (DDM)

The dividend discount model (DDM) is an effective method you can employ to assess your REIT’s value. As mentioned earlier, distributing most of your REIT’s profits as dividends is one regulation you need to meet to avoid liability for corporate income tax. Because of this reason, approaching your REIT valuation by focusing on this dividend model makes sense. For this approach, all you need is to discount your expected dividends to the present value

  • Multiples & cap rates
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Another great way to assess your REIT’s value is by using the Multiples & cap rates valuation approach. This valuation method involves the use of three different metrics: cap rate, equity value divided by FFO, and equity value divided by AFFO.

  • NAV approach

The NAV approach to assessing your REIT value focuses mainly on the market prices in real estate. This explains why a lot of investors prefer using this valuation method.

Unlike the traditional discount cash flow approach, which requires you to estimate future cash and then discount them into the present, NAV only focuses on what the market prices say. It’s simple; to value your REITs with NAV, all you need is to assess the fair market value of the assets in question.

Below are a few step-by-step guides to follow when using the NAV valuation approach:

  • First, you need to start by understanding the fair market value of the real estate value. To do this, all you need is to identify the net operating income (NOI) generated from the asset. After that, you need to divide this NOI value by the estimated cumulative cap rate.
  • The second step involves bringing down the net operating income in a way that covers the ongoing maintenance necessary for annual capital expenditures.
  • Next, you need to focus on the fair market value (FMV) of income that you didn’t initially include in the net operating income. This time, all you need is to value this FMV by applying a cap rate to the income.
  • With all values of income sorted, now is the time to adjust (or bring down) the value by corporate overhead. To do this, all you need is to divide your predicted corporate overhead for the coming year by the cap rate.
  • Lastly, you need to include your other REIT assets. After that, consider deducting your debt and stock to achieve the net asset value (NAV).
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Enroll in the right financial modeling course today

To further understand how to value your REITs using different approaches, you might want to enroll in a suitable real estate financial modeling course. With the right course, such as Real Estate Analyst, you won’t only understand how to value your real estate REIT assets. In addition, you’ll better understand how to use different metrics to understand the REIT’s performance.

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Michelle Gram Smith
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