A real estate investment trust or REIT is a company that owns, operates, or finances income-generating real estate. A REIT uses the combined money of several institutional and individual investors to own a share of real estate property. REITs are similar to mutual funds but for real estate.
According to Investopedia, a real estate investment trust makes it possible for every investor or owner of a real estate property to earn dividends from it without having to buy, manage, or finance any properties themselves.
Canada offers a robust collection of high-quality REITs that provide solid dividend income. There are three types of REITs that include:
- Equity REITs: They own and manage income-producing real estate. Revenue is generated through rent and you can buy this type of REIT like any other public company/stock through the stock market.
- Mortgage REITs: They lend money to real estate owners directly or in-directly through loans and mortgage. Their earnings are generated through the interest they earn on mortgage loans and the cost of funding these loans.
- Hybrid REITs: They use strategies from both equity and mortgage REITs.
REITs provide investors with exposure to several real estate verticals including residential, retail, commercial office space, healthcare, hotel/motel, and industrials.
However similar to equities, investing in REITs comes with a certain risk and there is no guarantee that you will get a positive return. However, REITs help to diversify your portfolio and lower the investment risk.
A look at Canadians REITs
According to TSI, Canadians can purchase trust units (essentially shares) the same way they would buy any other stock. This provides REITs with the money to buy and manage real estate. The REITs then collect rental incomes, pays its expenses, and distribute the rest which is around 85% to 95% of its funds from operations among unitholders.
This is done so REITs can avoid tax payment and instead unitholders are taxed upon receiving the distribution which is not a high amount.
Canadian REITs come with certain tax privileges and have been exempted from the Income Trust Tax. They can continue to maintain this tax-sheltered status if they fulfill certain conditions outlined below:
- REITs must not hold any properties other than qualified properties at any time during a tax year.
- At least 75% of revenue for a tax year should come through rent or mortgage interest from properties in Canada and capital gains from the sale of properties.
- At least 75% of the total fair market value of all trust properties that the REIT holds must be in Canada.
Why do you need to invest in REITs?
Investing in REITs can save you the cost, work, and risk of owning the property yourself as being a landlord can be similar to a second job where you have to be responsible for maintenance, rent, and the payment of taxes.
By investing in REITs, you get exposure to the real estate market without having to be a landlord. And although real estate assets can give high profits, they don’t have the liquidity of a REIT.
According to MoneySense, there are several other benefits that you can enjoy if you choose to invest in a REIT. You can enter the real estate market in as low as $10 per unit which will otherwise cost most citizens a fortune and not everyone can afford that.
As an investor, you have the freedom to choose whether you want to invest in the residential sector, industrial sector, or any other sector you are interested in. Further, it allows you to invest in multiple properties, diversifying your real estate investment options.
Another major benefit of owning REITs is that you can sell your holdings at the click of a button making them highly liquidity investments.
Holding REITs in a registered account such as a Tax-Free Savings Account (TFSA) will save you from taxes on any dividends or capital gains earned. Alternatively. if you invest through a non-registered account, you may have to pay the full marginal tax rate on any income distributions.
The Bullish takeaway
Real Estate Investment Trusts are suitable for investors who are looking for a stable stream of predictable income with medium to high-risk appetites. Like all other investments, it is important to do your due diligence before you invest in REITs.