November 4, 2021 Understanding Real Estate Investment Trusts

It’s quite a well-known fact real estate and homeownership is one of the more lucrative and stable investment instruments available, especially in southern B.C. and other urban centres across Canada. However, there are alternative ways to get involved without having to shoulder the significant upfront costs of acquiring a tangible property on your own. Enter the REIT, short for Real Estate Investment Trust. 

What is a REIT? 

A REIT is a company that owns or finances income-generating real estate. In the same vein as a mutual fund, the capital provided by a pool of investors is utilized to purchase and look after properties across a various number of sectors, ranging from shopping malls to condominiums, depending on the type chosen.  

As with stocks, most are publicly traded on major security exchanges, where investors can buy or sell individual units, thus making them very liquid. Unit holders receive a portion of a REIT’s income (at least 90 per cent is legally required to be paid out in Canada and the U.S.) in the form of a distribution, which is similar to a dividend, usually monthly or quarterly.  

How is it different than a real estate mutual fund? 

This is not to be confused with real estate mutual funds that, like the traditional variety, are curated by portfolio managers who employ analytical research to invest in shares of REITs and other real estate operating companies. Although offering exposure to a broader selection of assets compared to the above, management fees may be expensive.    

How homebuyers and renters can benefit 

For those saving for a home, putting money towards a REIT is one vehicle to consider, as a single unit costs as little as $10 and can often yield a larger return than a savings account, for example. Unit holders also gain the benefits of being a landlord minus the maintenance headaches. Selling is as simple as clicking a button on your trading platform — much simpler than listing a physical space. 

They represent an excellent way to diversify an investment portfolio as well, given the relatively low-risk nature of real estate. Individual REITs hold multiple properties across the country rather than isolated in a single city or region. 

Other types of REITs 

Besides an equity REIT, which is the majority encompassing residential (multi-family apartments), office (commercial buildings), healthcare (hospitals, nursing homes, etc.) and more, there are two additional kinds. 

Mortgage REITs loan money for mortgages, or purchase existing mortgages or mortgage-backed securities, and generate revenue not from collecting rent but via interest collected from debt. Unsurprisingly, the return is greater in higher interest environments. 

A hybrid REIT combines the aforementioned pair, simultaneously owning properties and investing in mortgage securities, resulting in a balanced approach capable of potentially profiting whether interest rates are rising or falling. 

To learn more about the financial side of pre-sale homebuying, read our articles on mortgages, deposit structures, and budgeting tips.  

By MLA Contributor Benjamin Yong