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Real Estate Tech hit hard – Real Estate Daily Beat

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Robert Reffkin (Credit: Compass)

News reports surrounding the real estate tech space continue to suggest that many startups are fundamentally traditional businesses with excess expenses. Truly disruptive tech companies should be in position to thrive when the economy recovers. 

  • Compass has laid off 15% of its staff, or around 375 employees. Founder Rob Reffkin is projecting a six-month decline in revenue of 50 percent. (TechCrunch)
  • Shared office-space startup Convene has laid off a fifth of its workforce, or about 150 employees. (BusinessInsider
  • Knotel finds itself in dire straits and is capriciously switching its focus to using the 5-million-square-feet it leases around the world for emergency needs. (CO)
  • VC-backed Sonder has laid off more than 400 people, about one-third of its staff. The company is the largest of a raft of startups that sublease stylish apartments for short stays. (TheInformation)

No more SoftBank bailouts…. Chief Executive Masayoshi Son poured nearly $100 billion into pricey, cash-burning startups in the last years of the bull market, said it would sell billions of dollars in assets to prop up its plunging stock price and shore up its debt-laden balance sheet following the threat of a ratings downgrade, according to the WSJ.

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Forget Real Estate Investments, Buy REITs! – The Motley Fool Canada

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With the stock market crashing and interest rates tumbling, now seems to be as good a time as any for real estate investments.

However, investing in real estate isn’t the only method of generating passive income — buying REITs is just as good, or better, depending on the investor.

Real estate investments

Of course, there’s no denying the earnings potential of a good real estate investment.

In theory, you simply front the down payment, charge more for rent than you pay for the mortgage, pocket the difference and eventually sell the house for much more than you bought it for.

However, there are a lot of finer details and things that can go wrong along the way.

For one, you have to be able to afford the down payment. Even if the housing market cools with a recession, a 20% down payment is still going to be at least $50,000-100,000 — depending on the area of course. This hurdle can take a lot of investors out of the running right away.

Now, even with the down payment covered, there can be a lot of issues surrounding renting the property out. Staging and showing the place, carrying out repairs, footing bills, property tax, and so on and so forth. These things simply eat away at your time and your bottom line.

So, in order to avoid these types of issues, REITs can be preferable to traditional real estate investments.

Advantages of a REIT

REITs generally don’t require a minimum investment, as they trade just like a stock. So, you needn’t worry about being able to put six figures down from the onset.

As well, when you buy into a REIT, you’re not going to be directly managing any property. You won’t be responsible for going out and fixing a busted fridge or finding a new tenant.

You simply invest your money with the REIT and they take care of all of that.

Disadvantages of a REIT

Obviously, you don’t have control over the properties the company chooses to buy. It’s therefore important to choose REITs that align with your investment philosophy from the beginning.

As well, you generally aren’t going to make a ton of money on your principal investment with a REIT. While the monthly income you can generate is quite substantial, REITs tend to just bounce around in price rather than outright grow over time.

So, come time to sell, you’ll more or less be getting your principal investment back, whereas someone making a real estate investment will generally sell for more than they bought for.

Choosing a REIT

Choice Properties REIT (TSX:CHP.UN) is Canada’s largest REIT and has over $16 billion in assets under management.

Most of its real estate investments are in the retail space, with a small but growing portfolio of other properties.

While its main focus is not on residential, but rather retail property, Choice is still well positioned to succeed in the near term.

This is because its retail locations are anchored by Loblaw, Canada’s largest grocer. Thus, Choice’s income and stability should be secured as Loblaw should continue to perform well as a vital service provider for Canadians.

Currently, Choice is trading at $12.87 and yielding 5.75%. At that yield, an investment of $20,000 would generate $100 a month in passive income.

Real estate investment strategy

Before making a real estate investment, consider whether it’s the best action for your situation. Under some circumstances, investing in a REIT can be a far better option.

As far as REITs go, Choice is one of the most stable options for Canadians, as its anchored by its main tenant, grocery giant Loblaw.

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How Do Real Estate Valuation Metrics Work? – Baystreet.ca

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For real estate investments, the metrics used to quantify how certain properties or portfolios/Real Estate Investment Trusts (REITs) are valued are different than the typical valuation metrics used on most conventional stocks on the TSX or S&P 500, for example.

This is because real estate has unique characteristics to that of operating businesses in the sense that real property tends to be long-term, bond-like physical assets with a “coupon”-like cash flow structure, most of which is paid out to shareholders (REITs tend to have payout ratios in the 90%+ range).

For REITs, assessing Net Operating Income (NOI) rather than earnings in the norm, with a REIT’s NOI representing rental/lease revenue less operating expenses.

A REIT’s cap rate is the yield an investor receives on a given property, and is equivalent to the NOI of a building dividend by the value of the building.

Lower cap rates mean higher building values, so comparing cap rates across REITs with similar geographical/property type mixes can tell an investor which portfolio of properties may be undervalued relative to each other.

Vacancy rates are another important metric to assess knowing how full a given portfolio of properties is, on average, relative to the overall market can tell an investor if said properties are well managed or not.

Invest wisely, my friends.

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Real estate industry taking precautions during COVID-19

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Jason Yochim, CEO of the SRA, holds a conference call with agents three times a week to share news, advice and protocols.

“With no more open houses, we’ve advised our agents on what we call essential sales activity,” he said in an interview. “For example, if I want to move to that bigger house I’ve always wanted, maybe now is not the time to do that.”

On the flip side, some people need to move. Life changes such as divorce, or settling an estate, or moving for employment purposes are considered essential housing transactions, Yochim noted.

“We’re guiding our members that way. We’re (also) encouraging them to utilize technology for showings, whether it’s Facebook live or virtual tour products.”

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