Many investors only look at valuation metrics when doing their respective due diligence on their investments. The REIT space is very popular with respect to this strategy. Consensus seems to believe that because the respective REIT may be well diversified with respect to location as well as tenant, the risk of the valuation decreasing significantly is small due to the sheer numbers of properties involved.

However, because REITs pay out the vast majority of their earnings to their shareholders in the form of dividends, many investors' principal priority is the sustainability of the dividend. When a REIT is able to consistently grow its dividend without affecting the payout ratio that much, it usually means that management is doing a good job of buying and selling property.

One such residential REIT which we are eyeing up at present is AvalonBay Communities (AVB). AvalonBay (with interest in approximately 300 apartment complexes) deals with apartment communities in areas such as New England and California to name a few.

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