Real Estate Investment Trusts, or ‘REITs’ for short, are a great way for investors to expand their investment portfolio and include real estate, without having to own, manage, or finance any actual real estate property.
However, like any other investment, it pays to do your research and you should be aware of the dynamics of your investment. To that end, we will be discussing REITs in detail today, including what factors to look at depending on the type of REIT you’re investing in.
We’ll also discuss the benefits of REITs and some other key considerations you should keep in mind before you decide to invest.
What Are REITs?
REITs tend to be heavily regulated and scrutinized which is to be expected especially considering they are not only listed on stock exchanges, but involve a great deal of public interest even if they are private REITs.
Types Of REITs
Understanding each different type of REIT will help you in making an informed decision for your investment and help you navigate the market that each of these REITs operate in.
Commercial or Retail REITs
The most profitable type of REITs are Commercial or Retail REITs and they make up more than 25% of the REITs market currently in Canada. Retail REITs own and manage large-scale commercial properties like office buildings, industrial complexes, shopping malls, retail outlets, and entertainment venues.
Retail REITs are largely dependent on the success of the different businesses operating within their properties. If you’re able to gather this information about the specific retail REIT you want to invest in, it will give you an edge.
If the businesses are doing well, then that means they’re paying their rent on time, which means the REIT is getting paid on time, which, in the end, ensures that you get a return on your investment in the REIT.
Residential REITs
Residential REITs own and operate residential properties, such as large housing complexes and apartment buildings. While not having the same returns as Retail REITs, Residential REITs do offer a steady return and would be a cheaper investment as well by comparison.
As with Retail REITs, do your research and look into the properties owned by the Residential REIT you want to invest in. Check the local area’s real estate market, what the prices are, what rental rates are, what amenities are available, and how well the area is developed.
The better the residential area, the more stability you can expect, not just in how the market does, but also in how well the Residential REIT will perform. Some other factors to take into account also include population, job availability, and economic opportunities.
Mortgage REITs
These REITs invest in mortgages rather than properties, and are involved in both commercial and residential real estate. As with mortgages, the success of a Mortgage REIT depends on the interest rate and rate of returns. The higher the interest rate, the lower the stock price of the REIT.
Mortgage REITs can be a bit more complex than Commercial and Residential REITs and you’ll need to follow a lot of different factors to judge the performance of the REIT. Mortgage REITs are a good option, but they would be better suited to a more seasoned investor who has experience in following the markets and assessing performance.
Benefits Of Investing In A REIT
Convenient Passive Income
Real estate offers some of the best opportunities for passive income and REITs allow you to enjoy the same passive income without having to buy the property yourself. In effect you’d be owning part of the property and earning from it, and, even better, you’d be free to sell your share without too much hassle as trading REIT units is as easy as trading stocks.
With actual real estate, you can expect to make a much bigger investment and if you wanted to divest, you’d have to go through the whole process of selling the property, which can take months or years.
Portfolio Diversification
REITs are considered as alternative investments i.e. not in the same category as stocks and bonds. The resulting diversification in your investments is bound to enhance your investment portfolio.
Portfolio Diversification
REITs are considered as alternative investments i.e. not in the same category as stocks and bonds. The resulting diversification in your investments is bound to enhance your investment portfolio.
You’re Investing In A Physical Asset
When you’re investing in a REIT, you are in effect investing in real estate which is a physical asset. Also known as real assets, you’d be investing in actual brick-and-mortar properties, rather than in a commercial objective, as you would when investing in shares of a company.
Tax Efficiency
Distributions to investors from REITs may be classified as gains rather than income, meaning you enjoy tax benefits.
Conclusion
REITs are a great investment option, especially if you have some extra money to invest and are looking for something that offers a stable return. It is no surprise that real estate is a profitable market, and REITs allow individuals ownership of real physical assets in the same way the wealthy do, but with a little bit of help.
Some of the best financial advisors in Toronto will tell you that REITs are a good option to invest in. Speaking of financial advisors, to assess how REITs would affect your individual portfolio, it would be best to speak to an expert and get a full detailed picture. Not only will you get a better idea of REITs, but you’ll also be told the tax impacts and long-term financial ramifications of your investment as well.
