Table of Contents
- REITs may help mitigate risk and volatility in your investment portfolio. [Jump to this section]
- REITs help to provide access to institutional-quality assets. [Jump to this section]
- REITs can offer investors regular and scheduled cash flow. [Jump to this section]
- REITs may offer investors a tax efficient investment opportunity. [Jump to this section]
A real estate investment trust (REIT) generally focuses on institutional-quality, large-scale, income-producing real estate properties. A REIT allows individual investors to gain access to a broad portfolio of these large properties without requiring the substantial equity required to purchase and manage the properties themselves.
What are some potential benefits of REIT investing? Read on to find out.
There are many benefits to having a diverse investment portfolio. A diversified portfolio can not only help to mitigate risk and volatility, it can also help to bolster overall returns when not all of your investments react in similar ways; this is known as de-correlated investing.
A REIT offers investors the ability to allocate their funds into multiple real estate assets, spread out geographically and diversified by type of tenant. While assets within the REIT can fluctuate in value, it isn’t common for all assets to be adversely affected simultaneously. This helps to lower an investor’s specific market risk when investing into a large-scale and well-diversified REIT.
As mentioned, another benefit of investing into a REIT is gaining access to a broad tenant mix, as typically not all tenants are the same (they can vary by type of business, demographics, geographic location, etc.). For example, in a retail REIT, the fund could be made up of essential services, like pharmacies, banks, and grocery stores. Alternatively, its focus might be more geared toward shopping centers or large single-tenant businesses. Tenant diversification has always been important but has been underscored during the pandemic and times of economic uncertainty since different asset classes and types of businesses may be affected more strongly than others.
Institutional Quality Assets, for the Everyday Investor
Many REITs leverage their economies of scale to purchase, manage, and optimize large-scale properties that may be out of reach for an individual investor. This means that investors not only benefit from participating in far-reaching and diverse real estate portfolios, but they can also benefit from consolidated and efficient vertical integration of the managing group, helping to cut costs, and, in turn, bolster returns.
REITs generally have a professional and skilled management team who purchase properties based on calculated income streams, leaving emotion out of valuation metrics. Well-managed REITs may help offer investors peace of mind, as they can invest their hard-earned capital knowing a seasoned and qualified team is working diligently to manage and optimize the assets within the fund.
Additionally, when investing in a REIT as compared to owning and managing your own bricks-and-mortar rental properties, Selling physical real estate can take months to finalize and has substantial associated costs. It can also be subject to emotional pricing and supply or demand constraints within the market.
Frequent Valuation, Frequent Distributions
Many investors are drawn to REITs not only for the capital growth opportunities, but also for the regular cash distributions they make (not to be confused with income or dividends). One way to assess the potential health and strength of a REIT is to assess how much of their Funds From Operations (FFO) – otherwise known as a payout ratio – the REIT is distributing. Investors should understand the history of the REITs payout ratio and whether or not the fund is distributing all of it’s available cash flow, or holding some back.
Opportunity for Tax Efficient Capital Appreciation & Cash Flow
Investing into a professionally managed REIT means investors are usually able to invest using registered funds such a TFSA, RRSP, RRIF, etc., helping to shelter potential gains on their holdings. When REIT Units are held within a registered account, the investment is subject to the tax rules of the registered account itself, regardless of what occurred tax-wise within the REIT that year.
Investing in a REIT through non-registered holdings can also have potential tax benefits. REIT distributions are not considered dividends and are therefore taxed differently. Distributions paid to investors are generally made up of a portion of Return of Capital (ROC), which is a deferred capital gain. Investors receive a T3 slip that clearly breaks down that year’s tax exposure and shows if there is anything other than ROC to be claimed. Anything that is categorized as ROC adjusts the investor’s cost base, which is a future capital gain, meaning only 50% of the overall gain is taxable at a future date.
Every REIT will have a different tax breakdown based on activity within that calendar year. It is important to understand the REIT’s historical taxation breakdown and to speak with your accountant or trusted tax professional to make a personalized tax decision that best suits your needs.
Finding the Right Portfolio Balance for Each Investor
These are just some of the many potential benefits that may come with choosing to invest in a REIT. As with any investment, it is important to do your due diligence and evaluate the REIT’s historical performance, its strategy, its management team, and the investment process. Ensuring you’re investing with a management team that are leaders in their business, and who have a proven track record of astute decisions and returns to investors, are essential pieces in the review process. The evaluation is well worth the effort to find a REIT whose performance can complement your existing investment portfolio and align with your investment goals.
Vice President, Wealth Solutions
Ray Punn is an experienced leader in management across the public and private sectors, including the Financial, Automotive, and Private Equity industries. As Vice President of Skyline Wealth, he leads a comprehensive team of Advisors, and oversees business operations, marketing, investment management, and investor relations. With a deep understanding of how each component of wealth management contributes to an exceptional investor experience, Ray and his teams focus on building long-term partnerships with Skyline Wealth’s valued investors.