When it comes to investing in real estate, the traditional thought is the owning of the physical property after taking a mortgage or purchasing it outright with cash. But what about investors who are interested in real estates without owning many assets? Unless you come from a wealthy family, you will not be able to invest traditionally in real estate. Thankfully, there is an alternative that can fulfill your ambitions.
Real Estate Investment Trusts (REIT)
An alternative way to invest in real estate, without the large amounts of cash or mortgage payments reducing the returns. This type of investment has been around in Canada since the 1980s. The REIT owns and manages properties. These properties include malls, residential properties, hotels, industrial properties, and office buildings. The management company will look for opportunities to increase the value of its real estate by decreasing costs and increasing income. An example of decreasing costs would be to look at the portfolio of properties and seeking opportunities to look for energy efficient upgrades where possible. For a retail investor, this is simply impossible because they do not own several properties in their portfolio and have the networks to negotiate for opportunities that lead to lower costs for energy.
The purpose of REITs is to provide stable and sustainable distributions. Although not guaranteed, the distributions are reliable because the majority of income from REIT comes from rent collected from the properties under management. What this means for the investor is that the investment will grow at a steady pace, sometimes more so than investing in corporations. Corporations reinvest most of their earnings back into the business whilst distributing a small portion to shareholders. REITs on the other hand, distribute anywhere from 70-90% of their earnings. This ultimately means more growth potential and more income earned for the investor.
Why REIT?
REITs are a good investment for investors seeking long term growth and income. The advantages of owning REITs are several:
1) Many REITs have high liquidity, meaning they are easy to buy and sell.
2) REITs take away the hassle of managing your own real estate, which can be like a second job.
3) Gain access to real estate not normally available for investors.
4) Tax advantages or tax deferrals which are not regularly available to being the landlord of your own property.
The other great benefit of investing in REIT is that you can start with an amount within the $5,000 range or less. REITs also have a low correlation to stocks and bonds, which gives them an advantage in the bear market.
Are REITs for me?
REITs just like any other investments, carry risks. Some investments in this category carry a higher risk than others. There are also several personal factors to consider when investing in an REIT. For example, how you will be taxed on your investment if it is to be held outside a registered account. Here are some facts to consider if REITs are a good fit for you:
1) Your investment time horizon and risk tolerance.
2) The purpose of your portfolio.
3) Weight in your overall investments.
4) Your investment style.
If you are a career focused professional or ambitious business owner, then REITs may be a good fit for you. The task of managing the shopping malls, hotels and residential properties befalls on the REIT company(s) you invested in.
On the other hand, if you are currently a landlord or are more comfortable in managing your own investments and can afford property, then REITs may not be a good fit for you. The upside of managing your own investment, whether it be real estate or the markets, is that you do not pay a percentage of your total earnings on a yearly basis. The fees associated with REIT management can be anywhere from 2-3% of your annual earnings. For example, a Jones Lang LaSalle REIT which had a return of 20% will show as 17.5% return because the management company already deducted the 2.5% management fees.
There are also many strategies associated with investing in REITs, such as using a Smith Manoeuver. However, each strategy can be tailored differently to each and every individual, and would be too much to detail in a brief overview.
Which REIT Should I Invest In?
Picking an REIT to invest should not be too difficult. You must be aware of what the purpose of your money is going towards. Is it going towards long term growth? Then pick an REIT that focuses on growth and income. Looking to keep an emergency reserve or generate current income? Then invest in an REIT that focuses mostly on generating income and tax efficient ways to distribute it back into your pockets.
As for companies that offer REITs, one of my favourites would have to be Jones Lang LaSalle, because they have been offering consistent returns and have beaten benchmarks in the past.
From what I have noticed, returns on investment is a key part to building wealth, but should not be the sole point of focus when it comes to investing. Choosing the right investments and having an overall strategy is what separates an average investor from a wealthy investor. Until next time, stay invested folks.
If you have questions regarding this article or wish to become more acquainted with the personal finance, you can reach me at jeffy9090@hotmail.com
