Let’s face it, real estate investing isn’t for everyone. We own one rental property and so far it has been going well but I do realize that bad tenants can potentially ruin a profitable investment property – not to mention the emotional stress they may cause.
Related: Lessons from a First-Time Landlord
So how can someone invest in real estate without buying any actual property? Real Estate Investment Trusts (REITs).
The Basics of REITs
Real Estate Investment Trusts are companies that own groups of real estate properties that generate income, mainly through rental agreements. Here in Canada, they are set up as trusts for tax purposes and aren’t taxed as long as they distribute their income to their shareholders.
When new housing areas are developed, the real estate development companies tend to develop shopping centers to compliment the new homes. REITs generate cash through monthly lease agreements signed with the companies that operate in the newly developed shopping centers.
They invest primarily in commercial real estate – offices, warehouses, hospitals, shopping malls and hotels. Other REITs focus on residential housing – usually large apartment buildings.
Related: 5 Advantages of Dividend Stocks
REITs offer the average investor an opportunity to own a piece of a large-scale real estate development without actually owning any of the physical property.
If you like investing in stocks but don’t like dealing with all the issues that come with having tenants – investing in REITs is probably right for you.
Advantages & Disadvantages
Advantage: ownership of large-scale projects. The typical investor (like myself) isn’t normally able to reap the rewards that come along with building large shopping centers. REITs allow average investors to invest in companies that have the available funds to build large-scale projects.
Disadvantage: lack of control. With our rental condo, I can control what maintenance is done, who does it, what costs are charged and how much to charge each month for rent. Investing in a REIT leaves all those decisions out of my hands and I have no control over the monthly revenues and expenses of each development.
Advantage: returns. Like regular real estate, REITs have proven to be a solid investment. RioCan (REI.UN) has increased nearly 100% in the past 5 years – and it also pays a monthly distribution with a current yield of 5%. Not all REITS have increased this dramatically, but the returns are definitely attractive for any investor.
Disadvantage: heavily dependent on interest rates. Interest rates are at historical lows right now, but that may change in the future. REITs are more affected by interest rate changes than other investments because of the financing of major developments. The more interest rates rise, the more their monthly costs rise – which may mean fewer returns for investors.
REITs to Consider
RioCan (REI.UN) – invests primarily in large retail centers located in major metropolitan areas. 54% of properties are located in Ontario. The other 46% is located in Quebec (13%), Alberta (8%), Northeastern US (8%), Texas (7%), BC (5%), and other parts of Canada (5%). Their top 3 sources of revenue come from: Wal-Mart (3.8%), Canadian Tire (3.5%) and Cineplex (3.3%). As long as people keep buying things – there will always be a need for large retail centers and RioCan can continue to succeed. (Disclaimer – I own REI.UN)
Riocan also offers investors the opportunity to DRIP at a discount of about 3%.
Related: The Basics of DRIPS (3 Part Series)
H&R (HR.UN) – focuses on office, industrial and retail properties. They tend to focus mainly on office buildings and lock-in leases for the long term. Their most significant development of late was “The Bow” building in downtown Calgary, which is leased to Encana for 25 years. H&R’s track record is impressive – with an increase of 174% over the past 5 years. The monthly distributions have increased numerous times over the same period and H&R offers investors steady cash flow at a reasonable valuation.
H&R also offers investors a 3% DRIP discount.
Boardwalk (BEI.UN) – focuses on multi-family residential properties, strategically located in areas such as Fort Saskatchewan, Regina, Edmonton and Calgary. Revenues are likely to grow in areas that are seeing increased rents and low vacancy rates – namely Calgary and Edmonton. It is arguably better able to handle a downturn in the economy because it focuses on apartments – and people will always need a place to live.
Conclusion: REITs can offer competitive returns and monthly cashflows without the headaches that come along with owning your own rental property.
Do you own any REITs? If so, which ones?