Aug 16, 2019
A REIT is a publicly traded organization that invests predominantly in income-producing real estate assets. REIT units are an equity investment, providing investors with attractive yields, plus the potential for capital appreciation. Most REITs specialize in a specific real estate sector, focusing their time, energy, and funding on that particular segment of the entire real estate horizon. However, diversified and specialty REITs often hold different types of properties in their portfolios.
Why Invest in a REIT?
REIT investing allows individual retail investors a distinct opportunity to access large, institutional assets that they otherwise may not have been able to acquire on their own. For sophisticated and educated investors who are interested in long-term cash flow and the stability that real estate investing provides—without the correlation to the volatile stock market—private REITs are a stable and viable investment option.
REITs provide a steady and generally reliable flow of income. In terms of security, apartment-based REITs are especially attractive investments, as they capitalize on the fact that shelter is a basic need. In other words: everyone needs a place to live, whether the economy is bad (when homeowners will sell and downsize), or good (when young people can afford to move out of Mom and Dad’s, and rent). Industrial commercial and office space portfolios, especially those comprising highly-flexible spaces with a strong tenant mix and multi-tenant base, can also provide incredible returns with added stability.
Another distinct advantage of investing in a REIT is the expertise of the REIT’s diverse management team, along with the benefits of the economies of scale that a larger portfolio can gain over a single-property owner. A REIT’s management team can provide unique insight and expertise in every field of real estate investment: acquisitions, property management, tenant relations, asset management, and marketing. Further, REITs can negotiate better contracts than individual retail investors for items such as waste removal and insurance, as they have a larger portfolio upon which to leverage. REITs can also more easily negotiate innovative new revenue sources, such as cable-sharing agreements, solar income, and roof rental contracts for satellites – thereby providing income opportunities that would likely not be available to a single-property owner.
If those weren’t enough reasons to consider investing in a REIT, one should also consider the diversification advantages that a REIT can offer, such as multiple tenants, multiple properties, a diverse tenant mix, and geographic diversity.
In addition, REITs have their own tax-advantages, classifying their returns as return of capital. Canada offers special tax treatment for Canadian income trusts. When they flow their income through to their unitholders, they don’t pay much if any corporate tax. Investors pay tax on most of the distributions as ordinary income (although part of some distributions qualify as a tax-free return of capital).
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