Operating an income property can be daunting. You have to collect the rent,
manage the building and keep on top of maintenance and repairs. And it is all the
more risky if you’re the only person responsible for the property. Indeed, your
investment can literally go up in smoke! The alternative is to invest in REITs,
which enable anyone to invest in real estate through an online brokerage
account, without getting their hands dirty.
Real estate investment trusts (REITs) are real estate investment companies
whose shares are traded on the stock market just like the shares of public
companies. Just as investing in a listed company allows you to own a small piece
of the business, investing in a REIT allows you to own a portion of a property
stock and earn a significant portion of its revenues.
How does a REIT work?
The principle is simple: a REIT is a trust that acquires, manages and leases
properties in order to generate maximum rental income. The profits are then
redistributed to the investors.
From a legal standpoint, the company must meet special criteria.
- 75% of the assets must come from real estate, whether in apartment
buildings, commercial properties or other.
- 75% of its income comes from the property it owns (from rent, interest
- 90% of the taxable income is redistributed to investors.
Why should you invest in a REIT?
REITs attract investors looking for investment income. Since almost all rents are
share, REITs offer a high distribution rate, generally ranging between 1% and
6%. The other advantage of REITs is that real estate is an asset class in its own
right, and many investors use it to diversify their portfolios. Lastly, residential
properties are assets that are not cyclical, because even in times of economic
crisis, individuals continue to pay their rent.
How to invest in a REIT
Like buying a stock, REITs are traded primarily on the stock markets. You can
invest through an online broker or an investment advisor.
How to choose a REIT
Before taking the plunge and investing in a REIT, there are things to check out.
There are different types of REITs specializing in different areas (hotels, housing,
retail spaces, offices, etc.). Beyond the distribution rate, you must also ask:
- Are the properties of good quality? Do they have good tenants?
- In what sub-category of real estate are the buildings? Residential,
- What is the occupancy rate? What is the debt ratio?
- Are the properties well maintained?
- Is the manager reputable? Are they a shareholder?
In addition, you should know that a REIT’s price is closely linked to its distribution
rate. A REIT that announces a decrease in its distributions will see its price fall,
and vice versa.
You’ll find answers to all of these questions in the prospectuses for the REITs
that interest you.
Avoid REITs with commercial properties and opt for residential
There are multiple subcategories in the real estate market, but the most common
in the REIT portfolio are residential real estate (usually renting apartments to
individuals) and commercial real estate. Commercial real estate itself is divided
into the rental of office space and retail space, a category that includes shopping
Keep in mind that residential real estate is the most stable segment, as this
segment is not cyclical. In fact, during an economic crisis, people always need to
have accommodation and, even if they experience financial difficulties, this is the
first bill they will pay.
Commercial real estate, although long-term leases are the norm, is much more
cyclical. Essentially, long-term leases do not protect a business owner from its
tenants’ bankruptcies. Nowadays, people are shopping online in greater numbers, and bankruptcies in the retail sector are increasing, as are closures of shopping centres. For the
same reasons, commercial arteries are more and more vacant.
Caisse de depôt, one of the largest owners of shopping centres in the world,
recently announced its intention to sell a third of its Canadian shopping centres.
The Canadian residential real estate market is also doing well. Montreal expects
prices to rise again in 2020 and the Canadian market is stabilizing.
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