But wait, what’s that on the horizon? Could that be an alternative that makes real estate investment simple and affordable enough for even us common schmoes?
If you’ve never heard of a reit (pronounced “reet”) don’t smack yourself on the forehead too hard. It’s a product that only came to Canada in 1994. (It’s been in the U.S. for eons.) A Real Estate Investment Trust, or reit, works kind of like a mutual fund and invests in a portfolio of real estate with the objective of passing its income on to its investors.
Don’t confuse a reit with investing in real estate stocks. A reit pays out income on a regular basis whereas a real estate investment stock would reinvest the earnings back into the stock. With a reit, you’re buying the company’s portfolio of real estate: office buildings, shopping plazas and industrial space. And you’re counting on that portfolio to provide you with a steady source of monthly or quarterly income from the leases and rents paid to the company. With a well-structured portfolio and good management and tenants, reit investors can earn a nice steady flow of income.
Another good thing about reits is that they benefit from the same tax advantages as a mutual fund trust—because the income is distributed to unit holders, the trust doesn’t have to pay tax on it—making reits more attractive than other forms of commercial investment.
Owning real estate directly can be a problem because real estate is generally less liquid than stocks or bonds. But reits allow you to get around this. reits are liquid since units are listed on an exchange and trade daily. And the diversification offered by holding a portfolio of properties means that reits are less risky than investing in a single piece of property.
Just as with a fixed-income investment, such as a bond or mortgage, if interest rates start rising, that could mean problems for reits. That’s because more expensive borrowing will add costs to the expense of running the properties, which eats into profits and means your dividends shrink.
A bigger risk would be an economic downturn that could compromise the tenants’ ability to pay their rent. So, you need to check any information available about the reit’s tenant roll to make sure it’s stacked with high- quality tenants who have executed solid long-term leases. Ask your broker or read the company prospectus to learn more about the tenants as well as the property manager’s reputation, since all the benefits of a reit quickly evaporate if the management team doesn’t know how to operate its properties and provide you with a stable income over the long term.
The reit market is still small in Canada. While there are about 200 publicly traded reits operating in the U.S., there are currently only 20 reits trading here in Canada. But that could mean you can get in on a good thing early, while it’s still a bit of a mystery to most other investors.
Land baroness…hmmm, I like it!