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What is a Real Estate Investment Trust?

Investing in Real Estate continues to be an attractive option for many investors for a couple of main reasons. First investors like having a physical asset backing their investments. The second main reason is the overall positive historical performance. In this post we will take a jab at explaining what is a real estate investment trust.

Many people think that you need lots of capital for down payment in order to break into real estate investing, but the truth is that anyone can invest in real estate, no second mortgage required!

Born out of the recession of the late 1980’s, REITs (or Real Estate Investment Trusts) are really entering their heyday here in Canada.  With 20 solid years of history, REITS are no longer a foreign concept to Canadian Investors.  They – in a nutshell – are a simple way for individual investors to earn a portion of the income produced by commercial real estate ownership and operation, without the investor actually needing to own or operate real estate.

REIT companies may own office buildings, retail spaces, hotels or resorts, apartment buildings, or other less tangible assets like mortgages or loans.  Generally, most REIT companies specialize in one specific type of real estate, such as Rio-Can here in Canada which specializes in retail properties.  REIT companies not only acquire and develop properties – they are required to operate the properties as part of their investment portfolio.  Investors, or unit owners, can expect to receive yearly dividends in addition to relatively stable monthly distributions.

REIT Advantages:

  • The main advantage to investing in REITs is that they are designed to pay out consistent cash flow for investors and must pay out at least 90% of their taxable income each year to unit owners in the form of dividends.
  • REITs offer income tax benefits for certain investors.
  • REITs are tightly regulated.  They are not permitted to invest your hard-earned money in unrelated or untested businesses.
  • REITs are a great way to diversify your investment portfolio.
  • REITS allow investors to take advantage of the benefits of investing in real estate without the stress and hassle of purchasing and operating the property yourself.
  •  REITS own physical assets that generate income and have the potential to appreciate in value over time.
  • Investors can liquefy their REIT investment at any time.

REIT Disadvantages:

When you invest in REITs, you are investing in real estate.  They come with the same risks associated with any other real estate transaction.  Increased vacancy rates can hurt your revenues and share prices can drop if property values decrease.  Changing interest rates can lessen REIT profitability and the high dividend payouts can force the REIT managers to take on debt to expand their real estate portfolio.

Unfortunately, there is no perfect investment opportunity.  Before you invest in REITs or any other investment option, you should carefully consider your own financial situation and goals.  It is always a good idea to consult with a reputable professional and have a game plan in place.

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