An investor can directly invest in real estate and manage the property themselves, or they can invest through a Real Estate Investment Trust (REIT). A REIT will own invest and manage a number of properties on behalf of the unit holders and distribute most of the income from the trust to the unit holders.
We think a REIT offers most investors more capital appreciation potential, income potential, and less risk than investing directly in a property.
Real Estate Investment Trust
Opportunity Cost and Time Investment
You have to spend time dealing with repairs, complaints, tracking your income and expenses.
You will have to copy a number from a slip onto your tax return once a year.
You may only have a few tenants. If a tenant stays for a long time you will have limited opportunity to raise rents.
A vexatious tenant may waste considerable time and resources. A tenant can cease paying their rent for several months before they can be evicted.
REIT management have a large pool of tenants and will normally benefit from any average increase in rents across their portfolio.
Non-registered accounts only. Investor must have the resources to make a down payment and secure financing for the debt portion of a purchase.
An investor can invest in their open or registered accounts, such as their RRIF, TFSA, or RRSP.
You are responsible for arranging the financing and the appropriate level of debt. Individual investors will often maintain too little debt, thinking lower is better. They may also carry too much debt and not have the resources to maintain their obligations if rents are interrupted.
The REIT will maintain a prudent amount based on their cash flow and value of their properties. Usually REITs will maintain a debt-to-equity ratio in the ballpark of 2:1.
For example, if a building is worth $9M, the debt would be about $6M and the equity about $3M.
Typically, smaller properties (whether residential, commercial, or industrial) that an individual investor can finance.
Typically, larger properties than a family can finance, with more rent/amount invested. An investor can choose a REIT focusing on residential, commercial, or industrial properties.
In the current environment, it is unlikely you can purchase a property with a few suites and have enough cash flow to pay the operating expenses and mortgage.
REITS benefit from economies of scale. For example, every REIT covered in the “Industry Report Q2/21 Real Estate Earnings Preview” had a positive “Funds from Operations” and yield.
Capital Appreciation Potential
We expect single-family and multi-unit residential real estate to behave similarly based on supply of and demand for rental units.
REITs are available that invest in different types of property. There are REITs that specialize in: Multi-Unit Residences(Apartments), Senior Living, Offices, Retail, Industrial, and others that investing in multiple sectors.