There are many approaches to property investing, making it easier today than it has ever been before. In Canada, property investment companies are allowed to run as trusts and trade on the open market, letting people buy shares called “trust units” like they would buy stocks. These are called “real estate investment trusts” or REITs.
REITs have both positives and negatives, making them ideal for some investors looking to get into properties and not for others. But how do they work?
How Do REITs Work?
REITs receive money to buy and manage properties through investors who buy trust units to fund the company. They can buy any kind of property, from residential units to commercial property to industrial buildings, and they can do this both domestically and internationally. The REIT then collects income from renting these properties out, covers their expenses, and then pays almost all its remaining income to the investors, known as unitholders. The amount spread out to trust unitholders is often between 85% to 95%.
Like stocks, the value of trust units can go up and down. REITs are medium-risk investments that are best done with long-term planning in mind, so investors should approach them with this perspective. Anyone who doesn’t want risk and needs high returns after a few short years should think hard about getting involved with a REIT, but for others, it could be the investment they need!
The Pros And Cons Of REITs
The biggest benefit of investing in a REIT is that’s it’s easy! For those confident in the Canadian real estate market but without the time or capital to buy properties themselves, it can be promising. They also don’t have to take on the duties of a landlord, which means no leaky faucets, appliance repairs, and tenant searches.
The taxation of trust units isn’t ideal, though. Unitholders are taxed when they receive their distribution, and they have to pay the full marginal tax rate on any income distributions if these payments are put in a non-registered account. This is because REITs don’t pay out after taxes; they flow through the trust and directly into the unitholder’s account. As an investor, you would have to keep track so tax season isn’t more of a headache than it already is.
If the long-term outlook in real estate is positive (as it is in Canada), investment in a REIT may be for you, and we can advise you on the right strategy. There are quite a few REITs from which to choose! But many people want to get into property investments as a hands-on way to make some extra money on the side or in retirement. For these investors, property flipping is fun, and REITs sound like they take that fun out of it! Luckily, there are ways to invest that don’t take work from the more ambitious investors but won’t overwhelm them either.
Sometimes the best way to invest in properties is with in-person partners rather than through a trust. Joint ventures give investors the chance to take part in the choice and renovation work of income property projects, opportunities they wouldn’t get in a REIT. It’s a great way to feel better about the job you’re doing and give you a fair strategy over which you can have more control!