Ready to start investing in real estate but unable to buy? Are you more suited to trading stocks than dealing with tenants? If that’s the case, a REIT might be the perfect solution for you to invest in real estate without actually buying a property.
Table of Contents - Finance Corner: Get Familiar with These 5 Types of REITs
A real estate investment trust (REIT) is a company that owns and often operates income-producing real estate. Many REITs are publicly traded, meaning investors can buy stock in a REIT and benefit from the company’s profit-sharing model. The trust is managed by experienced administrators, meaning you can trust your investment in seasoned hands while collecting income. Publicly traded REITs are also required to disclose information about how they manage the trust, helping you feel more secure.
There are as many types of REITs as there are types of real estate. If you’re looking to get started, start your research by exploring the five most popular types.
About 25 percent of REITs in Canada are retail REITs. They are the most popular type of REIT. Retail REITs own properties such as shopping malls, strip malls, retail outlets and other retail locations. These could be unenclosed properties anchored by a supermarket or a largely enclosed shopping center. These centers meet a variety of needs for consumers, ranging from shopping for their needs to simply providing entertainment. REITs must keep up with this always-evolving real estate sector.
A retail REIT’s success is closely tied to the success of the retail sector. REITs depend on tenants performing well and paying rent. If retail is performing well, then the REIT likely will too. Still, there are many different types of tenants within the retail sector. Grocery stores tend to be much more stable tenants than boutique clothing stores. It’s important to not only keep an eye on the industry but also to review what types of properties the REIT owns.
Residential REITs generally invest in and operate apartment buildings. Despite the name “residential,” these REITs generally don’t invest in single-family home developments but will occasionally include manufactured housing.
Before investing in a residential REIT, look at how well the real estate market is performing. As with retail, residential REIT success depends on having tenants who will rent and are willing to pay a premium. Cities where ownership is generally unaffordable forces people to rent. The biggest REITs focus on cities where renting is popular and housing is limited, like Toronto and Vancouver, which are great places for REITs to own property. Research where the specific REIT’s properties are located before investing.
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Population and job growth within the city are also important metrics to consider. When there are plenty of jobs and the economy is growing, it means the city is or will soon experience an influx of new residents. Rising rents and declining vacancy rates means it’s a great market for investing in rental properties. If new apartments aren’t constructed and demand continues, well-established REITs will flourish.
Health care REITs
Health care REITs invest in real estate-related to health care, including hospitals, medical offices, nursing facilities, retirement homes and related properties.
Healthcare REITs will grow in value and importance as the baby boomers age over the next 40 years. Increased demand in health care services means an increase in demand for health care real estate. Their success is also tied to Canada’s health care system’s funding. Like all REITs, these properties require rent-paying tenants, so the health care system needs to be funded well enough to keep hospitals, nursing homes and retirement homes fully occupied.
Portfolio diversity is important for finding a stable health care REIT. A mix of property types and customer types lowers the risk. A well-established REIT with experience in the healthcare industry will better understand how to maneuver changes in the sector.
Like other REITs, office REITs rely on business tenants to pay rent for office space. These properties tend to attract high-quality tenants who offer stable rental income. That’s because these tenants tend to sign long-term leases.
When evaluating whether an office REIT is the right investment, there are several factors to consider. First, look at the unemployment rate, especially in the area, and how well the economy is doing. You don’t want tenants’ businesses to fail or they won’t pay rent. The vacancy rate is another factor in how well the local economy is doing. As with all REITs, you also want to know how much capital the trust has for acquisitions. Look for REITs investing in properties in economically stable communities.
Roughly 10 percent of REITs are mortgage REITs, also called mREITs. These trusts invest in mortgages rather than physical properties. Mortgage REITs can focus on both commercial and residential real estate.
An mREIT’s success depends on interest rates. If interest rates rise, the mortgage REIT’s book value decreases which lowers stock prices. Additionally, a lot of the capital for mortgage REITs comes from secured and unsecured debt offerings. When interest rates rise future financing is more expensive and the value of the loans in the portfolio decreases. Interest rates in Canada have remained stable lately, making mREITs a good prospective investment.
Bonus: diversified REITs
Who says you can’t have it all? A diversified REITs is an equity REIT that owns more than on property type. While some REITs specialize only in apartment buildings or only in health care facilities, diversified REITs invest in at least two types. Diversified REITs can help lower the risk of focusing on a single industry like health care.
Successful real estate investing can be much easier with a REIT than buying and managing multiple properties. However, your reward is only as good as your risk. It’s important to do your research before selecting a REIT type or a REIT to receive your hard-earned investment dollars. Once you do, stay knowledgeable about the industry and your trust to ensure you’ll continue collecting real estate investment profits.
Understanding Mortgage REITs
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