Are you looking to invest in Real Estate but do not have the necessary capital to purchase and maintain a property?? Do you have the capital to invest in properties but want to avoid the unnecessary headache of dealing with midnight calls relating to maintenance issues of properties you have let out??
Are you looking for a steady, passive income without investing huge sums into purchasing and maintaining real estate properties??
We’ve got you covered! Let’s talk about REAL ESTATE INVESTMENT TRUST (REIT- pronounced REET) in Canada and how it works.
How does a Canadian Real Estate Investment Trust (REIT) operate?
So, REIT is a trust/corporation that manages, owns, and finances profitable real estate ventures, including commercial establishments, residential buildings, warehouses, or practically any real estate venture that can be let out for a steady source of income.
Where do real estate investment trusts in Canada get their investments from?
A REIT gets the money it needs to buy and manage profitable real estate from its investors by pooling in from different people who are looking to invest their money in real estate and do not have either sufficient capital to buy a property entirely by themselves or do not wish to handle the hassle of maintaining a property they own. Such people invest in professional REITs that allow investors to put their money in them and be assured of a steady income stream without owning an entire property!
How does REIT work in Canada?
REITs generate income as they own, manage, and operate income-producing real estate properties. This income produced in the form of rent is distributed as a dividend to the stakeholders who have invested in REIT portfolios. This ensures a steady income that is flexible but regular. Just like mutual funds, even REITs are subject to market fluctuations, rise and fall in property rates, property-specific risks, depreciation of property, etc. Hence, depending on the overall economic situation, one can make much money during a particular financial year or even less during the next year.
Which REIT types exist in Canada?
There are three REIT types based on how they are held or purchased, and they can be divided into further sub-categories. Before we try to understand each of them, it must be known that REITs are traded privately on major stock exchanges.
Types of REITs:
1 Publicly traded REITs:
REITs are traded like stocks and can be purchased through a brokerage account on major stock exchanges like TSX (Toronto Stock Exchange) and NYSE (New York Stock Exchange). A good example of a publicly traded REIT is the CANADIAN APARTMENT PROPERTIES REIT or CAPREIT, the largest Canadian REIT. Its ticker on the stock exchange is TSE: CAR.UN.
2 PUBLIC NON-TRADED REITs:
These REITs are traded on Real Estate Crowdfunding Platforms like Nexus Crowd,
Fund rise, Fund scraper, etc. Investors are drawn by advertising on internet platforms and social media.
3 PRIVATE NON-TRADED REITs:
Such REITs are usually available only to high-net-worth investors and are not traded on stock exchanges.
Apart from this broad classification, there are other types of REITs, like like:-
● Equity REITs
● Mortgage REITs (mREITs)
● Hybrid REITs (a mix of Equity and Mortgage REITs)
● Data Centre REITs
● Diversified REITs
● HealthCare REIT’s
● Hospitality REIT’s
● Industrial REIT’s
● Infrastructural REIT’s
● Office REITs
● Retail REITs
● Residential REIT’s
● Self-Storage REIT’s
● Specialty REIT’s
● Timberland REIT’s
Based on the type of property represented by them. For instance, equity REITs rent out residential and commercial real estate. Timberland REIT deals with space leased out for timber production and so on.
What Factors Have to be Considered While Selecting Canada’s Best REIT?
It is quite simple. Choose the one that yields the highest returns. Look for three main things before you choose to invest in a REIT.
Funds from operations of a REIT:
This indicates how much cash can be given out from such a REIT as a dividend. It gives us an idea of how much money has been paid to people who have invested in the REIT.
To what extent does your REIT demonstrate diversification:
Suppose you invest in more than just a diversified REIT. For example, if you have invested only in a commercial space and there is a recession or a drop in economic activity, you will suffer a loss. On the other hand, if you have invested in diverse portfolios like household property, commercial property, and retail stores, you are likely to generate more income from these properties than a single one.
What does the trust’s management team look like?
It is always preferable to do a background check on what the management team looks like, as their expertise in picking the right properties decides whether you profit from the property.
Compare the management expense ratio(mer):
Since REITs can be brought either through a brokerage account or a REIT mutual fund that invests in REITs or real estate companies, one must check the MER being charged by the management as their fees, which could impact the overall Return on Investment(ROI).
Which are the best Canadian REITs?
We list some of the best REITs in CANADA so that you are better prepared to invest your hard-earned money. Try to compare the dividend yield, payout ratio offered by different REITs and their diversification before making the final choice. The given list is based on the market trends for this year.
1. REIT Automotive Properties with a dividend yield of 7.98%.
2. CT REIT with a dividend yield of 6.7%
3. Canadian Apartment Properties REIT with a dividend yield of 5.38%
4. Dream Industrial REIT, which has a 5.38% dividend yield
5. 2.57% dividend yield is offered by Allied Properties REIT.
This list may keep changing with time in response to market fluctuations.
What benefits and drawbacks come with purchasing REITs in the Canadian market?
1. REITS are a blessing to those with neither the time nor the required capital to buy and maintain their property. It is a profitable alternative to real estate investments as you can profit from a property without owning it!
2. You can be assured of a steady source of income if you have invested in a properly diversified REIT and can always sell or trade your REIT stock whenever you need liquid cash. Especially since REITs are mandated by law to distribute their income to shareholders as dividends, your investment is protected.
3. One benefits from the expertise of teams experienced in selecting the right property, maintaining it, and managing the required paperwork like signing or renewing leases, etc.
1. Like mutual funds, REITs are subject to market risks and interest rate fluctuations due to the escalation in costs of borrowings on house properties.
2. Though one has a stake in a property they have invested in through a REIT, they need more control or the capacity to make decisions regarding home renovations and improvements as they do not own the property.
Investing upfront money in a single real estate property is a feasible alternative to purchasing REITs. It generates a steady source of income and also gives the option of easy liquidity whenever required.
1 Are REITs regulated in Canada?
Canadian Securities Regulators oversee REITs.
2 Is there a tax on REITs in Canada?
A REIT is not taxed on income from the rental business.