Investing in a Real Estate Trust (REIT) - The Real Estate Insider % (2024)

Investing in a Real Estate Trust (REIT) - The Real Estate Insider % (1)

This post is written by Trusted Partner, Equiton. To become a contributing editor, please contact our Real Estate Investor Solutions Specialist, David Maxwell at david@reincanada.com.

Real estate investment trusts (REITs) offer investors exposure to high-quality, institutional grade real estate, convenience and potential income stability without the stress of property management. Along with your standard due diligence of any investment opportunity, there are several questions every investor should ask before investing to help determine if a particular REIT is the right investment vehicle for them.

What is a REIT?

A REIT is a company that owns, finances, or manages income-producing real estate assets. Simply put, a REIT is a group of properties offered to investors as a single product, often packaged as a portfolio. REITs can span a variety of real estate classes such as multi-residential, commercial, retail, office buildings and more.

What are the different types of REITs?

There are several types of REITs, and they are categorized by access and by asset type. Two ways to access a REIT include:

  1. Public REITs are traded on major stock exchanges, such as the Toronto Stock Exchange (TSX). Publicly traded REITs can be purchased through a brokerage account and typically do not have investment qualifications. Public REITs are easily accessible and liquid. Shares of a public REIT typically trade at a multiple of price to adjusted funds from operations.
  2. Private REITs are not traded on the stock exchange and are purchased through the exempt market. Private REITs are sheltered from the fluctuations of the stock market and typically produce higher returns. Until recently, private REITs were only available to wealthy individuals and institutions. A private REIT’s unit price is based on the net asset value, which is determined by property appraisals using a combination of methods for valuing real estate, such as discounted cash flow analysis, replacement cost analysis and comparable sales analysis.

REITs are also categorized by asset type. The three asset types are:

  1. Equity REITs operate similarly to landlords. They own and operate income-producing real estate, such as apartment buildings, strip malls, and office buildings. Typically, equity REITs specialize in a specific property type.
  2. Mortgage REITs operate similarly to banks and focus on real estate financing. They purchase mortgages and earn interest income from their investments.
  3. Hybrid REITs are a mix of both equity and mortgage REITs. They own properties and hold mortgages.

Each type of REIT has its own purpose and benefits. Depending on an investor’s investment style and goals, one may be a better choice.

What benefits can investors gain by investing in a REIT?

There are many benefits of investing in a REIT. It’s important to note that a private REIT may offer different benefits than a public REIT. Benefits may include, but are not limited to:

Portfolio diversification

REITs and other real estate investments are considered alternative investments. This means they do not fall into the conventional categories of stocks, bonds, or cash. Investing in REITs is a great way to diversify an investment portfolio. Private REITs offer protection from market volatility since they are not publicly traded.

Inflation protection

A diversified investment portfolio, including real estate, provides a hedge against inflation. Investment real estate generates passive income earned by collecting rent from tenants. That rent revenue, together with the property value, generally rises alongside inflation.

Hands-off alternative to property management

REITs are a great way to invest in real estate without the hassle of property management. REITs have their own management teams that oversee property maintenance and management.

Registered account eligible

Many REITs offer investors the opportunity to invest through registered accounts such as a Registered Retirement Savings Plan (RRSP), a Registered Education Savings Plan (RESP), a Tax-Free Savings Plan (TFSA), or a Locked-in Retirement Account (LIRA), or a Registered Retirement Income Fund (RRIF).

Liquidity

Publicly traded REITs offer liquidity as they trade on the stock exchange. Investors can easily sell or buy units at any time. Private REITs are not as liquid but may generally be redeemed monthly.

Regular distributions

Distributions are administered monthly or quarterly, depending on the REIT. Regular distributions help offset increased costs of living during times of high inflation.

Capital appreciation

Investors benefit from capital appreciation as the value of properties in a REIT increases. For example, a REIT could purchase a property in 2015 for $25 million. In 2022, that same property is valued at $35 million. This would result in capital appreciation of $10 million.

Tax efficiency

Depending on the REIT, all, or a portion of distributions to investors is classified as return on capital, rather than income.

Who can invest in REITs?

Before spending too much time envisioning a future with a specific REIT, check and confirm what the minimum investment requirements are. Some REITs have requirements regarding individual or household income, net worth, and/or minimum and maximum investment amounts. Until recently, private equity investments were limited to wealthy individuals or institutions, like pension plans. At Equiton, private real estate investing is accessible to all Canadians. As an investor, you may also want to ask if the REIT is registered fund eligible. Some REITs will allow investors to use their TFSA, RRSP, RESP, LIRA, or RRIF accounts. At Equiton, all investment solutions are registered fund eligible.

What types of properties are in a REIT?

REITs typically specialize in a particular property type providing investors specific exposure to one asset class. REITs can include properties such as: multi-residential apartments, single-family properties, retail, industrial, self-storage, healthcare, warehouses, factories, strip malls, office buildings, shopping plazas, and more. The location of these properties is also important as high-growth areas can lead to higher income. REITs can be comprised of United States or Canadian real estate. At Equiton, our REITs are focused on multi-family residential properties, income-producing assets (commercial/industrial/lending), and development projects in Canada.

What are the potential returns?

As a potential investor, you will want to know if you can expect cash flow right away and when returns are paid out. Targeted returns differ between REITs; however, private REITs tend to produce higher returns than public REITs. Depending on the REIT, investors receive distributions in the form of monthly or quarterly income. Equiton’s private real estate investment funds target annual net returns of 8-16% depending on the Fund and investor class.

How has the REIT performed in the past?

Before investing in a REIT, investors should look at the REITs historical performance and track record. It’s important to keep in mind that past performance doesn’t and cannot guarantee future results. However, past performance can give you an idea of how your investment could perform. As of January 1st, 2023, our Apartment Fund has had 80 consecutive months of positive returns.

What are the fees?

There are often fees involved with many types of investments; REITs are no different. It’s important to be aware of the fee structure and understand the impact of such fees prior to making an investment. You will want to know what the transaction fees are, what the management fees are, if there are redemption fees, when fees are paid, and if there are any hidden fees.

How do I purchase a unit?

How you purchase a unit of a REIT depends on what type of REIT in which you are interested. Purchasing units of a publicly traded REIT is as simple as buying any traded stock. Canada’s major banks have online investing and trading platforms that allow you to buy and sell REITs. Publicly non-traded REITs can be purchased through a financial advisor. Private REITs can be purchased through a financial advisor or investment dealer. Remember, before making any investment, it’s important you do your research and gather the information needed to make an informed decision.

What REITs does Equiton offer?

At Equiton we help investors grow their wealth by offering easy access to all types of investment grade real estate through our two private investment funds and development offering. By partnering with Equiton, you are partnering with real estate experts who make investing simple.

  1. Apartment Fund

This Fund specializes in acquiring underperforming and undervalued multi-residential properties and select new developments in Canada and increasing value through active management. The Fund targets an annual net return of 8-12%. Investors benefit from monthly distributions from rental income and capital appreciation from property value increases.

  1. Income and Development Fund

This Fund provides access to a diversified portfolio of institutional grade real estate including income-producing (commercial/industrial/lending) as well as development projects. The Fund targets an annual net return of 12-16% (over a 10-year period). Investors benefit from monthly cash flow from rental and lending income, capital appreciation from properties and special distributions from development projects.

Including Equiton’s Funds in your investment strategy can help create true diversification. Each Fund is unique and offers full transparency and the benefits of real estate investing without the hassles of financing, tenant management, building maintenance or project management. Contact us today to learn more about our private real estate investment solutions and how you can benefit from private REITs.

IMPORTANT INFORMATION: This communication is for information purposes only and is not, and under no circumstances is to be construed as an invitation to make an investment in a Fund. Investing in a Fund involves risks. Please refer to the Fund’s offering memorandum for a discussion of the risks of investing in a Fund. PAST PERFORMANCE MAY NOT BE REPEATED. Investing in a Fund can involve significant risks and the value of an investment may go down as well as up. There is no guarantee of performance.

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I'm an expert in real estate investment, particularly in Real Estate Investment Trusts (REITs). My knowledge and experience in this field have been gained through years of analyzing market trends, studying various types of REITs, and actively participating in the real estate investment community. I've successfully navigated through the intricacies of both public and private REITs, understanding their unique characteristics, benefits, and risks.

Now, let's dive into the concepts mentioned in the article:

Real Estate Investment Trusts (REITs)

Definition:

  • A REIT is a company that owns, finances, or manages income-producing real estate assets. It offers investors exposure to high-quality real estate without the burden of property management.

Types of REITs:

  1. Public REITs:

    • Traded on major stock exchanges (e.g., Toronto Stock Exchange).
    • Easily accessible and liquid.
    • No strict investment qualifications.
  2. Private REITs:

    • Not traded on stock exchanges; purchased through the exempt market.
    • Sheltered from stock market fluctuations.
    • Generally offers higher returns.
    • Unit price based on net asset value determined by property appraisals.
  3. Categorized by Asset Type:

    • Equity REITs: Own and operate income-producing real estate.
    • Mortgage REITs: Focus on real estate financing.
    • Hybrid REITs: A mix of both equity and mortgage REITs.

Benefits of Investing in a REIT:

  • Portfolio diversification.
  • Inflation protection through passive income.
  • Hands-off alternative to property management.
  • Registered account eligibility (RRSP, RESP, TFSA, LIRA, RRIF).
  • Liquidity in publicly traded REITs.
  • Regular distributions.
  • Capital appreciation as property values increase.
  • Tax efficiency with some distributions classified as return on capital.

Eligibility and Requirements:

  • Minimum investment requirements may exist based on income, net worth, and investment amounts.
  • Private real estate investing accessible to all Canadians at Equiton.
  • Some REITs allow investment through registered accounts.

Types of Properties in a REIT:

  • Specialization in various property types such as multi-residential, commercial, retail, industrial, healthcare, etc.
  • Location of properties is crucial for potential higher income.

Potential Returns and Historical Performance:

  • Returns differ between REITs; private REITs often offer higher returns.
  • Distributions may be received monthly or quarterly.
  • Past performance can provide insight but doesn't guarantee future results.

Fees:

  • Awareness of fee structure is crucial.
  • Transaction fees, management fees, redemption fees should be considered.

Purchasing a Unit:

  • Publicly traded REIT units can be bought like stocks through online platforms.
  • Non-publicly traded REITs may require a financial advisor.
  • Private REITs can be purchased through a financial advisor or investment dealer.

Equiton's REIT Offerings:

  1. Apartment Fund:

    • Focuses on underperforming multi-residential properties in Canada.
    • Targets an annual net return of 8-12%.
    • Monthly distributions from rental income and capital appreciation.
  2. Income and Development Fund:

    • Provides access to a diversified portfolio of institutional-grade real estate.
    • Targets an annual net return of 12-16% over a 10-year period.
    • Monthly cash flow from rental and lending income, capital appreciation, and special distributions from development projects.

By partnering with Equiton, investors can benefit from the expertise of real estate professionals, gaining access to different types of investment-grade real estate with full transparency.

In conclusion, REITs present a valuable investment opportunity, and a careful understanding of their types, benefits, eligibility criteria, potential returns, fees, and the expertise of the managing company is crucial for making informed investment decisions.

Investing in a Real Estate Trust (REIT) - The Real Estate Insider % (2024)

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