Tuesday, November 6, 2012

REITs: Own Real Estate Without The Headache

Kyle, a long time reader of the Loonie Bin asked me A LONG time ago(sorry Kyle) to write a post on REITs. Well the day has finally come to share with you a in depth look at what a REIT is , where the heck they came from and how you can invest in them. A basic definition would be:
Real estate investment trusts or REITs are corporations who own and operate income generating real estate property.

The History

REITs were created in 1960 when President Dwight Eisenhower signed the legislation and the U.S congress passed the Real Estate Investment Trust Act. Before this, only the wealthy  and large corporations had the capital to invest in large real estate projects and facilities. Now the average person has the same ability as the wealthy to invest in large real estate investments using REITs. In Canada, REITs were not introduced until 1993 and are exempt to the changes in taxation of income trusts.

 Real Estate For Everyone

To invest in REITs, one must purchase units on public stock exchanges. Just like purchasing a normal stock, you pay a commission to a broker who acts on your behalf. Each unit of a REIT represents a portion or fraction of the underlying properties it owns. These units or shares pay the investor a certain amount of distribution or dividends every quarter or month, depending on the REIT. Normally to invest in real estate you would have to get an agent, a mortgage, a lawyer, and worst of all a renter! It’s a big headache to dish out a lot money and to have all the liability hanging over your head. By investing in REITs, you let the corporations deal with the headaches which allows you to focus on all the positives!

Types of REITs

In general, there are 3 different categories of REITs:
  • Equity REITs- The purchasing and management of properties.
  • Mortgage REITs- They normally buy or sell mortgages to property management companies for upgrades or planned purchases.
  • Hybrid REITs- The best of both worlds! They buy/sell mortgages and manage property!
There are many different types of REITs available in Canada:
  • Residential
  • Retail
  • Office
  • Healthcare
  • Industrial
  • Specialized
  • Diversified

Pros and Cons

To me, real estate seemed to be more of a headache then a good investment idea: dealing with tenants, upkeep and maintenance, and having large amounts of debt keep me up at night. Although you could be super rich, then I’m sure those problems and many others wouldn’t be a concern. Then again, I’m pretty sure super rich people will not be reading this blog. None the less, here are some of the obvious advantages to investing in REITs:
  • Zero liability – No mortgage, no tenants, no maintenance, no insurance, no debt, no fees, no accountants = no problems, mon!
  • Any amount will do- Only have $5000 to invest in real estate? Just pay $10 in commission and you can be a Lord of the Land…kind of.
  • Rent on time, every time- The dividends will be deposited directly into your trading account. No pity stories or midnight moves to worry about.
  • Highly liquid- You can sell your shares in a REIT much easier than any large scale piece of property. What’s turnover rate on a mall these days anyway?
  • Pure Profit- As the profits increase, so do the share price and dividend payouts.
And now the disadvantages to REITs:
  • …I have nothing
Yes there are things that can influence REIT prices like the state of the economy, but those kinds of risks are part of any investment traded on the stock market. That’s why it’s important to invest in the right kind of REIT that meets your tolerance level and to thoroughly research any type of investment you plan to undertake. Make sure the REIT you invest in has valuable properties that will be sought after, even during economic down times. No one wants to invest in vacation properties during recessions or ice cream shops in Nunavut. Due diligence is our friend, people!
 Do you invest in REITs? Which ones are your favourite?

This article was written by The Loonie Bin. If you enjoyed this article, please consider subscribing to his feed.  

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