Real estate investment trusts (including Canadian REITs) can provide you with a stable, profitable way to invest in real estate
Top-quality REITs, Canadian REITs among them, are among the most stable and highest-yielding real estate investments. That’s because many REITs hold high-quality, non-depleting assets, and have taken advantage of low interest rates to lock in financing costs for long terms. The best of the REITs--private or public REITs, U.S. or Canadian REITs--have good management and balance sheets strong enough to weather economic downturns like COVID-19 and so on. They also have high-quality tenants and carefully match their debt with their lease income.
All in all, REIT investing is a good option for investors looking to invest in real estate.
Are Canadian REITs a good investment?
Canadian REITs can be a good investment depending on your financial goals, risk tolerance, and market conditions, but they come with both benefits (stable income, diversification, tax advantages) and risks (interest rate sensitivity, economic vulnerability, property-specific issues).
Real estate investment trusts focus on income-producing real estate such as office buildings and hotels. That segment of the market is difficult for most investors to access through direct ownership of property. Moreover, real estate investment trusts save you the cost, work and risk of owning investment property yourself.
If you’re investing in real estate primarily for profit, outside of REITs, Canadian REITs included, you should look at multiple-unit rental housing or commercial properties, especially those with big parking lots or extra land. Investments like these can give you current income, plus long-term development possibilities. That’s a potent combination for patient investors. And of course, location is the most crucial part when it comes to real estate investing in Canada or any country.
What are tax implications of Canadian REITs?
In Canada, REITs distribute income that may be taxed as interest, dividends, capital gains, or return of capital, with different portions subject to different tax rates, and they must be reported on T3 slips.
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What are some tips for investing Canadian REITs?
- Did the REIT buy its assets in the midst of a recent boom, or has it owned them for some time? Bidding for assets in the midst of a boom tends to be risky, since it can lead to unpleasant investment surprises.
- How much debt is the REIT carrying? This is an important question for both Canadian REITs and others. You need to gauge the debt in relation to all assets, including those that are hidden and those that appear on its balance sheet. Too much debt in relation to assets can lead to a steeper downturn in distributions when the business hits a snag.
- Are there any special factors worth considering? With REITs, you need to look at the quality of tenants, length of leases and the possibility of improving the use or expanding the occupancy of existing properties. That applies to Canadian REITs as much as their region or city of focus.
- Is the REIT the subject of a lot of favourable broker and media attention? If so, investor expectations may be excessively high, and that leaves the trust vulnerable to a steep downturn on any hint of bad news.
REIT investing can pay off if approached properly
As mentioned, the best Canadian REITs and others will still do well during an economic slowdown. That often allows them to take advantage of low interest rates to refinance long-term mortgages.
We still advise against overindulging in REITs, including Canadian REITs. But if you stick with high quality trusts, they can make attractive, low-risk additions to your portfolio.
Should private REITs be part of your REIT investing strategy?
A private REIT is real estate investment trust that is not publicly traded on a stock exchange, unlike a conventional REIT. That means that private REITs, even private Canadian REITs, calculate the value of their own units and needn’t reveal all the information that’s available with publicly traded investments.
A private real estate investment trust typically portrays this feature as a benefit—since it avoids what it sees as the volatility and speculation of public markets.
But at the same time, private REITs lack the scrutiny from nosy outsiders and analysts who will find out about, and draw attention to, hidden risks and problems that the REIT happens to suffer from.
Overall, we think investors should stay away from private REITs. Instead, stick with publicly traded REITs—and benefit from the full scrutiny of investors and regulators.
This article was first published in 2017 and is regularly updated.
Has investing in REITs been a safer method of real estate investing than others you’ve used?
