I am often asked about what REITs is and if it makes a good investment opportunity. I have tried to explain about REIT (Real Esate Investments Trust) as a general interest topic in this blog post. Please note that it does not construe as financial or investment advice on REIT. It would be prudent to consult with a financial advisor and a tax planner if you are considering investing in REITs.
Real estate investment trust funds or REITs are publicly traded organizations that invest in income generating real estate assets. They offer medium risk capital appreciation to investors. REITS makes a good real estate investment option for those who don’t want to do all the work that comes with being a landlord.
How to Purchase REIT
REIT units are pretty much shares and therefore are purchased like any other stock you see on the stock market. REIT can consist of different types of residential or commercial real estate properties. You can invest in Canadian properties or go international. You can own units for as low as $10. In comparison, an investment property in Canada would require a 20% down payment which means you will need $100,000 upfront to buy a $500,000 property.
How does REIT Makes Money
REIT generates money from rental income of the properties. You receive a share after expenses are recovered from the income. This is about 85% to 95% of the rent collected. Your dividend yields will vary based on rental rates, interest rates etc.
There are Different Types of REITs
There are several types of publicly-traded REITs for you to consider including:
- Retail REITs (example shopping malls)
- Residential REITs (example apartment buildings)
- Healthcare REITs (example senior housing)
- Office REITs (example office buildings)
- Mortgage REITs (tied to the mortgages of properties)
Is there any risk with REITS
As with any other investment, there are some risks associated with REITs. Real estate market conditions will have an impact on potential earning or loss. Although you can use leverage to purchase REITs through investment loans or even a line of credit, banks usually don’t offer low rates that they do for direct real estate investment. You must also consult with a financial advisor regarding taxation implications on REITS.
Learn more about indirect or passive real estate investing.
How does REITS compare with Buying an Investment Property?
Liquid assets: When you own trust units you can sell them when you need cash. You get immediate cash with REITs while you have to wait to sell your home before you see any money from the sale. And you have to pay capital gains tax.
No effort required: A REIT is a low maintenance investment that requires no effort on your part. Being a landlord will most definitely require some work on account of rent collection, maintenance etc. But lets not forget that you can always hire property management services.
Diversification: By investing in diverse REITs you help mitigate risk by putting all eggs in one basket.
Leverage: When one borrows to invest in real property, rent helps to pay mortgage.One cannot get this benefit when investing in stock market (REITs etc).
Who Should Invest in a REIT?
If you are a medium-risk investor and want to invest some money in the Canadian real estate, REITS can easily get you some good passive income. And if you stay the course of about five years, investing in REITs is a good option or step into the real estate investment.
What are the benefits of Buying an Investment Property as opposed to Investing in REIT?
Leverage: When one borrows to invest in real property, rent helps to pay mortgage.One cannot get this benefit when investing in stock market (REITs etc). Regular rental income from an investment property is one of the top advantages that makes investing in real property highly profitable.
Many of our our GTA real estate market investors thrive on the buzz that comes with being a landlord of a real property. They put down payment as little as 25% down payment for a home or a condo in the GTA, and are willing to take on the chores and responsibilities of being a hands-on landlord.
Our investors choose our A la Carte Property Management Services, which takes the burden away from them and gives them peace of mind. At the same time their Mississauga & area property is rented and continues to generate rental income from tenants, and the equity also increases in value with time.