When we consider the idea of investing in real estate we tend to think that there are only 2 options.
A residential building or a commercial building.
But actually, there is a third option, real estate investment trusts.
In fact, there might even be a fourth. You can also buy shares of companies that invest heavily in real estate.
Except here we will be dedicating our time on REITs.
Real estate investment trusts are companies that own and collect rents on commercial and residential properties. REITs are similar to closed-end mutual funds investment. To find out what a closed-end mutual fund is, you can always read my article https://theaddictedreader.com/index-fund-or-an-etf-which-one-is-for-you/
You can choose to invest in an individual REIT (owning a unit of a company that owns properties) or a REIT ETF which is a type of fund made up exclusively of REIT shares.
Investing in an individual REIT is more complex because you have to take the time to analyze it, so it requires some knowledge. So for the majority of people, I recommend a REIT ETF.
By investing in a REIT, you become a unitholder. Each of these units gives you the right to receive a flow of income as if you were receiving rents and even to be able to vote at meetings of unitholders.
REITs are like stocks, they are traded on the stock exchange.
You have 2 options if you want to buy a REIT:
- Do it with an investment advisor
- Open a discount brokerage account to trade on your own
Being a form of alternative to direct investment, its objective is really to maximize the payment of income. While still offering the potential for share appreciation.
Avantages of an REIT over real estate
There are 4 advantages to investing in a REIT
- It’s liquid, so if you have a chance. You can easily sell your shares and get the cash. In the case of direct investment, it can take months before the building is sold
- It doesn’t require any management on your part. So you don’t have to worry about a tenant who does not pay or to maintain the building
- In addition, you do not have the problem of having to buy buildings in different regions to benefit from diversification. Because as they say, having all your eggs in one basket is not a good idea.
- If you buy REIT units through a TFSA to avoid paying tax on income and even on the sale of your units!
Speaking of diversification, you have to pay attention to your other investments.
Because you may have investment funds that probably already have shares in the real estate industry.
So there is the danger of having too much of your money in real estate which could increase your portfolio risk.