Please ensure Javascript is enabled for purposes of website accessibility

REITs and FFOs

By Motley Fool Staff – Updated Nov 16, 2016 at 2:21PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

REITs may deserve a spot in your portfolio. Learn more.

If you're interested in real estate investment trusts (REITs), you'll likely run across the acronym FFO. It's important to understand what a REIT's FFO tells you. Think net income or operating income, sort of. With most companies, net income is a useful number to evaluate, reflecting the profits left over from sales after all expenses have been subtracted. With REITs, though, net income isn't as meaningful. (Remember, REITs are Real Estate Investment Trusts, special kinds of corporations that must pay out at least 90% of their taxable income in dividends.)

According to accounting rules, the value of REIT properties is decreased over time, with depreciation charged against net income, reducing it. In reality, however, these properties are probably not falling in value, and may even be appreciating. So, a REIT's net income tends to understate its health. This is why, with REITs, you should look at the "funds from operation," or FFO, instead. The FFO ignores the effect of depreciation and other non-cash charges to help you see a REIT's true performance.

To learn more about REITs, read these two Fool articles: "REITs: The Other White Meat" and "ConsideredREITs? Buffett Has." And drop by the NAREIT website, too.

And if you're in the market for investments which, like REITs, kick out significant income (often via dividends), grab a free sample of our Motley Fool Income Investor newsletter. It recommends several such investments each month, many of which are REITs.

Finally, here are some recent articles about specific REITs:

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.