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Five Reasons Why I Love REITS

Commercial office buildingThis is a guest post by Hank Coleman who writes about retirement and investing on his blog, Money Q&A.

Have you ever wanted to invest in real estate but didn’t want to get your hands dirty flipping, fixing up properties, or finding tenants? There is a way to invest in real estate exactly as you would if you were investing in a mutual fund. A real estate investment trust provides you with a great type of investment that can help you diversify your portfolio while also providing you with the dividend stream that dividend investors have grown to love.

What Is A Real Estate Investment Trust (REIT)?

A real estate investment trust, also known simply as a REIT (pronounced ree-eat), is an investment company that typically owns and/or operates real estate or real estate related assets. REITs have the ability to invest in a wide range of real estate endeavors such as commercial properties, apartment complexes, hotels, shopping malls, office buildings, warehouses, mortgages, and other real estate assets. Typically, investors can purchase shares in the REIT almost exactly like you would purchase shares in a mutual fund. REITs provide investors who want to own real estate with an alternative investment to actually investing directly in the real asset itself.

Five Reasons Why I Love REITS

REITs Offer High Yields

Real estate investment trusts are a great alternative for investors who are looking for a higher yield. Since interest on savings accounts and returns on government bonds have been at incredible low rates for several years, many investors are continuing to seek out new investment opportunities with a decent rate of return. According to Kiplinger Personal Finance, REITs that own property have an average yield of 3.8%. And, it is not unusual to find some individual REITs yielding as high as 8% or more to investors depending on the type of underlying real estate assets held in the trusts. Many REITs can be found offering 5% to 6% yields consistently for five years or more.

90% Of Profits Distributed As Dividends

There are many rules that REITs must follow in order to qualify for special tax treatment and exemptions. In the United States, REITs must by law distribute 90% of their taxable income to their investors each year in order to be considered a REIT. REITs also must have at least 75% of their assets invested in real estate, government securities, or held in cash. Failing to follow these rules could result in a REIT losing its preferential tax status. In the United States, REITs do not pay corporate tax and pass the tax burden directly to individual investors who pay ordinary income tax on REITs’ capital gains and dividends that are distributed.

Good Tax Treatment

Even though capital gains and dividends received by an investor from a REIT are taxed at the investor’s ordinary income rate, real estate investment trusts’ good tax treatment as a corporation still give investors quite a unique benefit that is hard to find elsewhere. Because REITs pay no corporate income tax, they do not qualify for special treatment as qualified dividends which are typically taxed at 15% in the United States. Depending on your specific tax bracket, you as an individual may have a lower marginal tax rate than a REIT would if it was taxed at a corporation which results in more profit going directly into investors’ pockets.

REITs Offer Diversification

REITs offer investors an opportunity to increase the diversification of their portfolios. Typically, real estate in general and therefore REITs who hold real estate reduce investors’ risk and allow them to diversify their assets away from other investments that are more closely correlated with the financial markets such as stocks, bonds, and mutual funds.

A Liquid Investment

Unlike investing in an actual real estate asset like a rental house or condo yourself and tying up your money for years at a time, REITs provide investors with a great amount of liquidity. REITs operate exactly like a mutual fund with respect to the ability of investors to simply buy and sell shares of the REIT at any time. This allows you as an investor to move in and out of the real estate market when, where, and as quickly as you wish.

Real estate investment trusts allow you to invest in all kinds of different real estate assets without the mess of closing costs, lawyers, inspections, finding buyers or tenants, and the like. REITs are a great alternative investment that produces dividends and a high yield for investors who are looking for another way to find a good rate of return and diversify.

REITs for Canadian Investors

Here are a few posts on REITs for Canadian investors:

 

Hank Coleman is a finance writer who has written extensively for many financial websites and publications in addition to his own blog, Money Q&A. Hank holds a Master’s Degree in Finance and is currently studying to take the Certified Financial Planner exam.

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37 Responses to "Five Reasons Why I Love REITS"

  1. Hank says:

    Ninja, thanks for loaning me your readers for today. I really appreciate it.

  2. From all the talks that is coming from the Big Five Banks, us Canadians are piling more household debt and the fear of a balloon deflation the house price. I may want to stay away from the REIT investments for now, but the dividend and EPS is quite teasing to resist.

    • Student Investor I totally understand your concern. Back in the late 80′s to early 90′s I was working in the construction industry and saw first-hand the melt-down in commercial realestate. There were many real-estate mutual funds at the time that were doing very well, specifically in commercial realestate. That was until nobody was renting commercial office space becuase of the recession.

      It’s definitely turned me off investing in REITs. However REITs all hold different assets. For example I think shopping centers, office towers, and the such will be around for a long long time to come. When I look at companies like RioCan, Boardwalk REIT, Cominar or H&R REIT I see some pretty solid business models. Am I rushing in, no not right now.

      But consider what all the big pension funds in Canada hold at the moment: US Stocks, Bonds, and Commercial Realestate (direct ownerhsip of shopping centers and office buildings). REITs have always been part of a well diversified portfolio…

      btw Congrats on starting to invest early! This will pay off big-time for you in the long run ;)

      Cheers!

  3. Echo says:

    Thanks for the mention, guys! What do you make of RioCan’s buying spree of late? Any chance we’ll see a distribution increase soon?

  4. Vicky says:

    I have been thinking of adding REITs to my portfolio, but was thinking about a REIT ETF instead of specific REITs for now since my allocation would only be around 5% to start.

    That being said, do you feel like their growth potential is still there? They have been increasing quite a bit, especially in the last few years.

    Why are you hesitating on purchasing REITS? Are you thinking of adding them to your portfolio sometime in the future?

  5. Six figure investor says:

    The main reason i like REITs is an uncommon one. They also issue debt that is very attractive as a substitute for bonds and money market funds. In this age of low interest rates its difficult to find yield and i have put a very large portion of my port in REIT bonds.
    REITs require large amounts of capital (even the highest qualty ones) which is financed through both debt and equity. Right now high quality companies offer bond coupons even higher than their own equity yields.

    The.most conservative REITs are the so called triple nets which enter into long term (10-20 years) contracts with tenants. These are the ones i prefer.

  6. Hi Vicky as mentioned my memories of commercial real estate in the late 80′s to beginning of the 90′s will always leave me feeling hesitant to jump into REITs. However I think the large REITs such as RioCan for example are solid.

    However, you are right the growth in REITs has been spectacular (becuase of the high yield). Is there more room for growth? I think there is, but increasing interest rates can affect the bottom line in this industry IMO.

    I plan to DRIP RioCan this year. Your play to purchase through the ishares ETF is an excellent way to play this – then you really get the diversification :)

    Cheers

  7. A way to contradict yourself, I just brought couple of shares of RioCan this morning.

  8. Great post Hank!

    I love my Riocan!! Steadily rising dividends, and the shares have also gone up over the years!

    • Hank says:

      @ Average Joe – I stay away from most investments that are not liquid. That’s a good heads up. I didn’t even realize that is an issue because those types of investments are the ones I avoid.

      @ Mark – DRIPs and REITs two of my favorite things especially if they are going to offer a discount. I love DRIPs that offer a discount….sometimes they are hard to find. Thanks for the compliment. I appreciate it.

      @ Kanwal – Thank you very much.

  9. How about the Vanguard Global ex-U.S. Real Estate ETF (VNQI)? I like the idea of just how diversified it is, and truly gives you a broad exposure to the asset class around the world (plus as a Canadian, I’m a big fan of non-hedged USD bets right now).

  10. AverageJoe says:

    I’m also a fan of REITs in moderation, Hank, for all the reasons you mentioned.

    All REITs aren’t liquid, though. There are many brokers out there peddling non-traded REITs. While these offer the upside of not succumbing to current market conditions, your principal is tied up for a long time….often 8 – 10 years or more.

  11. REIT’s are definitely something we want to add to our portfolio in time. However right now we are just using index funds until we build up a bigger base.

  12. @Hank – nice post!

    @Ninja – nice job having Hank write the article!

    All fun aside, really well done guys.

    I love my REITs, I own a couple of them. Both are DRIPping synthetically.

    Ninja, the great thing about REITs, if you eventually DRIP them, you get a discount!

    Canadian REIT = 4% discount
    H&R REIT = 3% discount
    RioCan REIT = 3.1% discount. Not sure why the extra 0.1, but I’ll take it :)

    Nothing wrong with a REIT ETF, but I prefer direct ownership where I can. No fees, discount and liquid investment.

    Mark

    • Hank says:

      Mark – DRIPs and REITs two of my favorite things especially if they are going to offer a discount to purchase shares. I love DRIPs that offer a discount…sometimes they are hard to find though so it is cool to see REITs offering them. Thanks for the compliment. I appreciate it.

    • Be'en says:

      Can you buy individual REITs directly through TDW and still get the discounts and dripping or do you have to buy them from Compushare (?).

      I don’t suppose one would get the benefits of the discounts if one invested through ETFs offered by either iShares of BMO.

      • Be’en Hi there, you do not get the discount when you go through any discount broker, discounts are only through the transfer agents. The transfer agents would be Computershare and now Canadian Stock Transfer.

        Whne you DRIP through a discount broker, you can only “synthetically” DRIP full shares, so if your dividends are not enough to buy one share you cannot DRIP. You can “full” DRIP partial shares with a transfer agent.

        With ETFs you get a very good yield and diversification. The ETF would get the benefit of the discount – which I suppose in an indirect way also benefits you as well ;)

        Cheers

        • Maritimer says:

          Some brokers do pass on the discount, as stated in the following URL:

          http://www.dripprimer.ca/canadiandiscountbrokers

          I believe the DRIP discount is honored if the brokerage gets the additional shares through the transfer agent and company treasury set up. If the DRIP shares are found in the open market by the brokerage firm, then there is no discount honored.

          Partial, or fractional shares, are not available in discount brokerage accounts except Canadian Shareowners Association.

          • Maritimer Thanx for pointing this out!

            But I don’t understand how the discount broker applies the “discount”, or more importantly how an investor would request that discount. If its only a synthetic DRIP, then what’s the advantage?

            Cheers and thanx

  13. 101 Centavos says:

    I heart REITs. I have a few, but looking to get some more in due course.

  14. Poor Student says:

    I am looking to add REIT’s sometime soon. But like a couple people have mentioned, I do not want it holding too much of my allocation so it may be a while until I buy one.

    My very small portfolio will be a very high percentage in a single REIT if I bought now. I am going to keep buying other stocks or ETF’s before jumping in, even though I am very excited about the high yields of REIT’s.

  15. Thx for the mention Ninja!

    awesome post ;-)

  16. Awesome post REIT’s are the best options for getting almost all the benefits of real estate and earning passive income in dividends for someone who does not wants the hassle of owning and maintenance of a real estate.

  17. Jordan says:

    I’m in Ontario and it seems I either need to be an accredited investor, or invest a minimum of $150,000!

    Are there any REITS for Ontarians that don’t have these restrictions? and why does Ontario and Quebec have these rules in the first place? I can’t seem to find the info.

    • Jordan,
      You are likely referring to what is called “private” or “alternative investments”. This where firms go to private investors instead of the open market. There are some REITs, oil companies, and other resource companies that work in this way. Best to stay away from those!!

      The REITs that Hank is referring to are all traded on the stock exchanges. Here in Canada you can buy REIT units as you would stocks right on the TSE. For example:

      RioCan REIT (REI.UN)
      H&R REIT (HR.UN)
      Boardwalk REIT (BEI.UN)
      Canadian REIT (REF.UN)
      Calloway REIT (CWT.UN)
      Allied Properties (AP.UN)

      Please see the links at the bottom of the article for “REITs for Canadian Investors”

      Cheers

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