If you have millions of dollars to invest, amassing multiple real estate properties is not a problem. If you aren’t named Buffett or Gates, however, it’s not usually an option.
Fortunately, the average investor has another option. Real estate investment trusts (REITs) are companies that own income-generating properties in a pool, allowing interested investors to add real estate to their portfolio without breaking the bank.
According to a wealth and investment adviser with RBC Dominion Securities, “REITs purchase real estate to provide cash flow for investors. They often take on leverage to enhance income by borrowing against their properties, allowing them to buy larger ones or to acquire a greater volume of real estate.”
Though all REITs share a basic structure, there are different types. Some REITs invest only in senior-living properties, while others focus on apartment buildings or commercial real estate. Retirement residences and apartments tend to offer a bit more stability in rental income than their commercial counterparts.
While a typical mutual fund has management charges, REIT fees cover property operating costs, such as staff and maintenance expenses. The fee varies from trust to trust and even year to year, depending on maintenance outlays and the cost of showing suites when tenant renewal rates drop.
Despite the fee fluctuations, REITs have their benefits.
“For a relatively small amount, you can invest in commercial real estate that normally takes hundreds of thousands of dollars to access. It also offers diversification, as you’re purchasing a part of 20 or 30 properties. Most REITs pay a monthly income to investors, so that’s a consideration as well.”
However, as any savvy investor knows, there’s no upside without downside.
“Income in a REIT is taxed like interest income, so there’s no dividend tax credit. Consumers should be mindful that the amount of borrowing or leverage within a REIT makes it very interest-rate sensitive. Also, keep in mind that if a building needs a lot of maintenance, you could have significant and unexpected expenses that would lower your income.”
At the end of the day, whether REITs are right for you depends on your investment style and goals. They tend to attract more independent investors seeking a long-term option that also generates income. REITs aren’t for everyone, but if you’d like to own a piece of multiple properties, and you’re just a few million dollars short at the moment, they could be a good fit for your portfolio.