The Retail Investor: How to Analyze REITs and Invest your Money like a Pro in the Stock Market by Big Jodhi

Author:Big Jodhi [Jodhi, Big]
Language: eng
Format: mobi
Published: 2020-08-22T16:00:00+00:00

Liquidity risk

Similar to interest rate risk where we talked about the 2008 credit crunch, let me share with you how REIT loans work. Commercial property loans are slightly different from residential properties. For homestay, the mortgage lasts 25 to 30 years, and the homeowner slowly pays back interest to the bank and equity into the property. Commercial loans, however, don’t last very long. They typically have a tenure of maybe 5-7 years, after which the borrower, in this case, the REIT, would require to make a balloon payment and return everything back. Now, as you know, REITs distribute 90% of their income, so how the heck is the REIT going to pay up? They don’t. They refinance. In other words, they borrow money again from another bank to pay up to its previous bank, or they simply roll over the loans that they made with their current bank.

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