Chris MacDonald has had a love for finance his whole life, ultimately leading him to pursue an MBA in finance. He's worked as a financial analyst for a number of companies in the corporate finance and venture capital space during his 10-year investing career. He endeavors to follow in the footsteps of iconic investors like Warren Buffett in building a long-term defensive portfolio.
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Canadians love investing in real estate. Whether it’s owning a home or taking a slice of a real estate investment trust (REIT), there are plenty of options available that allow investors to participate in one of the most stable and consistently growing real estate markets in the world.
The question is, which sector should investors focus on? Of course, there are residential real estate (homes and apartments), industrial real estate (warehouses and distribution facilities) and retail real estate (strip malls and other related retailers). The options are endless, and the potential for each asset class is different.
Here are three of the top players in the aforementioned sectors I think are worth considering.
Dream Industrial REIT
Dream Industrial REIT (TSX:DIR.UN)is an open-ended, unincorporated REIT. The trust portfolio comprises industrial properties located in key regions of Canada and the United States. Its primary objective is to build and grow its portfolio and provide stable cash distributions to its unitholders.
Dream Industrial is among the most stable dividend stocks on this list, providing a distribution of 70 cents annualized per share. The company’s funds from operations grew double digits on a year-over-year basis in 2023, signaling the strength of its core business model. As long as this growth continues, I think Dream Industrial and its 5.4% yield are worth buying right now.
Canadian Apartment Properties REIT
Canadian Apartment Properties REIT (TSX:CAR.UN)is a REIT predominantly engaged in acquiring and leasingmulti-unitresidential rental properties in Canada. Its portfolio consists of apartments andtownhomeslocated near public amenities in Canada, and most of its holdings are aimed towards the luxury and mid-tier markets.
Canadian Apartment Properties REIT has added more rental homes worth $122.295 million in Canada. Hence, such additions enable this trust to generate higher income and offer solid returns to the unitholders.The company has generated a robust operating income of $692 million in 2023, representing 6.4% year-over-year growth. So, there’s some relatively strong income growth supporting the company’s 2.9% dividend yield (which is the lowest on this list). I’d rate Canadian Apartment REIT a hold here.
SmartCentres REIT
SmartCentres REIT (TSX:SRU.UN)is a Canadian real estate giant with more than 174 strategically located properties in various communities in the country. The company’s wholly-owned residential sub-brand, SmartLiving, offers complete, connected and mixed-use communities on its existing retail properties.
SmartCentres’s focus on key retail locations in city centres with large blue-chip anchor tenants is a good thing. However, the company’s sky-high yield of 8% does signal stress within the company’s core business model. SmartCentres does appear to have a relatively robust balance sheet, but potential tailwinds in the retail sector concern me. Thus, this stock is rated as a hold in my books, and I wouldn’t be putting fresh capital to work in this name right now.
Bottom line
Overall, I think investing in real estate should be considered for those with a multi-decade time horizon. Anything can happen in the near term, but most real asset classes rise in line (or even slightly above) inflation, depending on where interest rates go.
My personal preference is to focus on industrial real estate, followed by residential and retail. I think industrial real estate trends will remain strong, with greater demand for distribution in strategic locations near city centres. People always need a place to live, so residential real estate would be my second choice. And I think there are just too many headwinds facing retail right now that I’d be more cautious with this group. But over the long term, investors in either of these asset classes should win.
REITs invest in the majority of real estate property types, including offices, apartment buildings, warehouses, retail centers, medical facilities, data centers, telecommunications towers, infrastructure and hotels.
Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making. Many REITs are publicly traded on exchanges, so they're easier to buy and sell than traditional real estate.
The market and Nareit often refer to equity REITs simply as REITs. mREITs – mREITs (or mortgage REITs) provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments.
Even with a challenging market, REITs are considered a staple for many investment portfolios thanks to the 90% rule. As the name implies, this rule stipulates that real estate trusts must distribute 90% of their taxable earnings to existing shareholders.
Today, one of the most popular and productive classes of REITs is residential REITs. These companies invest in residential rather than commercial rental property. They will own things like townhomes, apartment buildings, multifamily high-rises and even single-family homes.
Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them.Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
When interest rates rise, investors run for cover towards any good asset that they can find. Alternative investments, like real estate investment trusts (REITs), can be a good option, depending on the market cycle.
How Do You Make Money on a REIT? Since REITs are required by the IRS to pay out 90% of their taxable income to shareholders, REIT dividends are often much higher than the average stock on the S&P 500. One of the best ways to receive passive income from REITs is through the compounding of these high-yield dividends.
In fact, investors may have unknowingly invested in REITs, as shares in REITs can be embedded in mutual funds or exchange-traded funds (ETFs) contained within their 401(k) plans, IRAs, Thrift Savings Plans or other pension plans. To invest in REITs, start with opening a brokerage account online.
The Cheapest Option: REITs—$1,000 to $25,000 or more
A REIT offers the investor a relatively high dividend as well as a highly liquid method of investing in real estate. Most real estate investments are not easy or quick to get out of. An exchange-traded REIT is. Moreover, you can start small with a little bit of cash.
This transition period can provide relief for REITs that would otherwise lose their domestically controlled status solely due to the new look-through rules for nonpublic domestic C-corporations.
In terms of tax, a REIT's income may be considered “bad” under rules governing the trusts contained in Sections 856 of the Internal Revenue Code. An overabundance of such income can cost a REIT its tax-favored status.
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
Some REITs invest directly in properties, earning rental income and management fees.Others invest in real estate debt, i.e., mortgages and mortgage-backed securities. In addition, REITs tend to focus on a specific sector of properties such as retail or shopping centers, hotels and resorts, or healthcare and hospitals.
Residential REITs invest in rental housing like apartment buildings, single-family rental homes, student housing, and older adult residences. They earn revenue primarily through rental income from occupants. Commercial REITs invest in properties leased to retail, office, industrial, and other business tenants.
Equity REITs are real estate companies that own or manage income producing properties – such as office buildings, shopping centers and apartment buildings – and lease the space to tenants.
Mortgage REITs—also called mREITs—invest in mortgages, mortgage-backed securities (MBS), and related assets. While equity REITs typically generate revenue through rents, mortgage REITs earn income from the interest on their investments.
Introduction: My name is Jonah Leffler, I am a determined, faithful, outstanding, inexpensive, cheerful, determined, smiling person who loves writing and wants to share my knowledge and understanding with you.
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