A REIT is a powerful investment that is part of many strong portfolios. A REIT is even more attractive if you can hold the investment in either a TFSA account (Canada) or Roth IRA account (United States).
Let’s take a look at what a REIT is, and what makes it an attractive investment.
What is a REIT?
So what exactly does a “REIT” stand for? A REIT is short for “Real Estate Investment Trust”. This is usually a company that owns income-generating real estate properties, and the REIT trades just like a stock on the markets.
In order to qualify as a real estate investment trust (REIT), the company must distribute at least 90% of its taxable income to shareholders. This is a great rule as it ensures that the company can’t hoard cash, and that investors are getting the proper return on their money.
Here are some key features of a REIT:
1. The vast majority of REIT’s are traded exactly like stocks. This makes them very easy to buy and sell – unlike owning actual properties which can take months to buy/sell.
2. There are a ton of sub-sectors that REIT’s can invest in. These can include rental apartment buildings, retail spaces, office buildings, medical centers, and warehouses just to name a few.
3. If you don’t have enough money to buy investment properties, then a REIT is a great way to get into the real estate market.
4. Most REIT’s pay a monthly distribution. This is technically different than a dividend, and will receive different tax treatments. Depending on the REIT, the distributions might be counted as normal income, capital gain, or a return on capital. Don’t get scared by this though. At the end of the year, your investment brokerage will send you a tax slip, and all you have to do is fill out your taxes with the information on the slip.
5. If you’re able to buy REIT’s in a TFSA (Canada) or Roth IRA (USA), then you will pay zero tax on the distributions if the REIT is based in your own country. If you’re an American buying a Canadian REIT or vice-versa, then there may be a withholding tax.
How to buy REIT’s?
You can buy and sell individual REIT’s directly on the exchanges. The process is exactly the same as if you were buying some shares of Apple or Netflix.
There are also REIT ETF’s and mutual funds that bundle a bunch of individual REIT’s together – much like normal stock ETF’s and mutual funds. These can also be bought on the same exchanges.
If you have enough money and have found a good REIT, then we would suggest buying enough shares and automatically reinvesting the distributions so that you can get at least one more share of the REIT each distribution cycle. This will allow you to compound your growth.
Should you buy REIT’s?
A solid REIT is a good addition to many portfolios as it produces a relatively stable income stream that can be tax-free if you can hold it in a TFSA or Roth IRA. It is also a great way to get exposure to real estate investment without having to put up a big down payment in order to buy your own property.
If you’re on the fence about being a landlord, then investing in a rental apartment REIT can be a good alternative. You’ll likely make less money when compared with running your own rental as you don’t have the benefit of leveraging your money, but you also won’t have tenants calling you in the middle of the night complaining about a broken air conditioner.
If you are already heavily exposed to the real estate market, then buying REIT’s may not be the best choice for you as you would likely want to diversify a bit.
One last thing to keep in mind is that REIT’s are not typically going to have huge movements in the price since the companies pay out over 90% of their taxable profits as distributions. Of course, there are exceptions like the 2008 financial crisis or the 2020 COVID-19 crisis where REIT prices got crushed and then rebounded.
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