Investors and financial advisors routinely laud real estate as one of the best places to invest your money. Most people are familiar with real estate. They may own a home and possibly rent out a spare bedroom or basement suite – they understand what it entails, investment-wise.
However, not everyone has the means to own and operate a property to generate rental income and realize gains from price appreciation. An alternative way to participate in the real estate market is by purchasing Real Estate Investment Trusts (REIT).
A REIT is a company that operates in the real estate industry. REITs own, manage, or finance real estate with the purpose of generating income. They pool capital together from investors and provide returns in the form of dividends and capital appreciation. While some operate as private investment vehicles, most REITs are publicly traded like stocks.
As an investment opportunity, REITs provide investors with access to the real estate market without directly purchasing a property. You can invest in REITs through a mutual fund or by purchasing them directly on an exchange through a brokerage firm.
New to investing? Try investing using a robo-advisor.
REITs tend to specialize in a certain sector of properties. Below are some of the most common types of REITs you can invest in.
Residential REITs invest in rental apartments and manufactured housing. To maximize income and generate stable cash flow from rent payments, they tend to purchase properties in urban areas, where demand for rental units is high.
The performance of residential REITs depends on factors such as home affordability and the cost of single-family homes. If home prices decrease and mortgage rates drop, homeownership will become more appealing to people, so the demand for rental properties will decline. Conversely, if the cost of owning a home rises, people will be more inclined to rent. For this reason, you should assess the state of the market before investing in residential REITs to determine whether people are more likely to rent or buy a home.
The level of employment, population growth, and vacancy rates are other aspects you should analyze. An economy with low unemployment, an increasing population, and falling vacancy rates is ideal for residential REITs.
Check out if it’s worth renting or buying a home.
These REITs invest primarily in shopping malls and freestanding retail stores. Much like residential REITs, they generate income from rent charged to tenants. Hence, investments in retailers with reliable cash flow and locations that attract plenty of shoppers are crucial.
The state of the overall economy greatly impacts retail REITs. In a healthy economy, jobs are plentiful, so people are more apt to visit retail stores and spend money. In contrast, people are less eager to shop in a contracting economy and opt to save their cash.
Also, changes in peoples’ spending habits are important to consider. Consumer shopping trends have increasingly shifted toward online retail, resulting in reduced profits for firms still operating mostly physical outlets. Shopping centres have also seen marked declines in traffic.
The best performing retail REITs invest in properties with strong anchor tenants, such as grocery stores, where demand is consistently high. They also find innovative ways to fill vacant locations that they own, such as converting retail space into an office.
Find out how you should be budgeting your money.
Mortgage REITs are unique in that they don’t directly own any tangible real estate. Instead, they issue mortgages to real estate owners or purchase mortgage-backed securities. They generate income by the interest they earn on their investments in mortgages and mortgage-related assets.
The model that mortgages REITs utilize makes them susceptible to interest rate increases. Should interest rates rise, the value of their holdings would decrease, which would, in turn, depress their stock price, as well as increase their cost to raise capital. However, a period of falling interest rates would have the opposite effect and result in gains in their mortgage portfolio
Healthcare REITs invest in real estate that operates in the healthcare field, such as hospitals, medical centres, and retirement homes. These REITs are one of the safest to invest in, as demand for medical services typically stays high, irrespective of what’s happening in the broader economy.
Want to be a more active trader? Try using Qtrade or Questrade.
Healthcare REITs’ performance is tied to the healthcare system, so an increase in the demand for health-related services will translate to higher returns. The ideal healthcare REIT should be well-diversified and have steady income streams, including facilities that care for an increasingly ageing population.
Learn more about how to invest your money.
These REITs make investments in office buildings and generate rental income from tenants. As a result, they seek to purchase property in locations where demand is high and likely to grow in the future.
The state of the economy and the unemployment rate impact the performance of office REITs. When businesses are expanding their operations, they hire more people and require new office space, which presents opportunities for office REITs to acquire property that can be readily leased. During an economic contraction, however, these REITs don’t fare so well – they may lose considerable income if their vacancy rates climb.
Good quality office REITs own properties in large economic centres, have plenty of capital for acquisitions, and can pivot by finding unique ways to earn income from unused space they own.
Before you decide whether to put some of your money into REITs, you should ensure you’re aware of the pros and cons of this type of investment.
Learn more about safe and risky investments.
While there are benefits to owning REITs as part of a well-diversified investment portfolio, it’s worth examining how they compare with directly owning and operating a rental property.
Here are 5 questions you should ask yourself before investing in rental property.
Buying rental property? Learn why you need landlord insurance.
REITs are an ideal investment for those wishing to add some diversity to their portfolios and those looking to invest in real estate without having to purchase it directly. As with stocks, their value can erode during a recessionary environment. But a proper mix of REITs can provide adequate income and growth for many years and may even outperform other asset classes. As with any investment, ensure you do your research to determine whether they’re the right option for you.
Rating of 5/5 based on 1 vote.
Mark is a writer who specializes in writing content for companies in the financial services industry. He has written articles about personal finance, mortgages, and real estate and is passionate about educating people on how to make smart financial decisions. Mark graduated from the Northern Alberta Institute of Technology with a degree in finance and has more than ten years' experience as an accountant. Outside of writing, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.
Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.
Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
Earn up to 12,000 bonus Scene+™ points in your first year (that’s up to $120 towards travel).
New Offer! Get up to $2,000 cashback + a $50 bonus on signing up. Conditions apply.
Earn an average 5%¹ cash back at thousands of partners and at least 0.5%² cashback guaranteed.
All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.
When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.
Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.
