These days, there are tons of investments available for purchase. You may have come across the term REIT, but may not know what it is or how this investment works. REIT stands for real estate investment trust. It is an asset that investors can purchase to be part of the real estate market without actually owning real estate. In this post, we’ll answer the question of what is a REIT, how it works, and what are the different types. Are you ready to learn? Let’s go!
Table of contents
- What is a REIT and how does it work?
- What types of REITs are there?
- How is REIT income taxed in Canada?
- How do you qualify as a REIT in Canada?
- Are Canadian REITs a good investment?
- Key Takeaways
What is a REIT and how does it work?
A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Typically, REITs have a corporation or trust structure and are available for trade on major stock exchanges. The purpose of a real estate investment trust is to provide investors with exposure to the real estate market without the need to directly own or finance property. REITs typically focus on a specific type of real estate, such as office buildings, apartments, hotels, or shopping centers. They may also specialize in a particular geographic region, such as a city in Canada.
Real estate investment trusts are either public or private, but most publicly trade on stock exchanges. This makes them accessible to a wide range of investors, including those who might not have the time or resources to invest directly in real estate.
By law, REITs must distribute at least 90% of their taxable income to shareholders in the form of dividends. This makes them an attractive investment for those seeking income and stability.
In addition, because REITs must spread their earnings across several different properties, they tend to be less volatile than stocks and other investments. Real estate is a relatively stable market compared to others. However, it is important to remember all investments carry some risk, and you should consider consulting with a financial advisor before making any decisions.
What types of REITs are there?
There are different types of REITs, each with its own benefits and risks. Here’s a look at the most common ones.
|Type of REIT||Summary|
|REIT fund||General term to describe a REIT|
|REIT ETF||An exchange-traded fund composed of numerous REIT investments|
|REIT stock||A REIT traded on a major stock exchange|
|Mortgage REIT (mREIT)||REITs that specialize in mortgage-backed securities|
|Residential REIT||A REIT that specializes in residential properties|
|Public REIT||A REIT traded on a major stock exchange|
|Private REIT||A REIT that’s traded anywhere except in a public market place|
What is a REIT fund?
A REIT fund is a type of investment fund that allows investors to pool their money and purchase a portfolio of properties. Real estate investment trusts allow individuals to invest in a variety of property types, ranging from office buildings and shopping malls to apartments and hotels.
One of the key benefits of investing in a REIT is that it provides exposure to the real estate market without the need to purchase real property. In addition, REITs offer a number of tax advantages, which can help to boost returns.
While there are some risks associated with investing in REITs, such as the potential for changes in the value of the underlying properties, these funds offer an attractive strategy to gain exposure to the real estate market.
What is a REIT ETF?
A REIT ETF stands for a real estate investment trust exchange-traded fund.
A real estate investment fund ETF invests in a basket of real estate companies that own and operate income-producing real estate, such as office buildings, shopping centers, warehouses, and apartments.
A REIT ETF generally provides investors with exposure to a broad spectrum of the real estate market, without the need to purchase individual properties. The benefits of investing in a REIT ETF include diversification, liquidity, and professional management.
However, real estate investment fund ETFs may be subject to higher expenses than traditional index funds, and they may not provide complete protection from the risks associated with investing in the real estate market.
For more information on ETFs, check out our complete guide here.
What is a REIT stock?
A REIT stock is a type of investment that allows you to pool your money with other investors to buy real estate. The underlying real estate is anything from apartments to office buildings. Plus, the stocks are available for purchase on major exchanges.
Real estate investment trusts are an attractive investment because they offer the potential for high returns, while also providing a steady stream of income.
One downside of investing in REITs is that they can be highly volatile on the stock market, so it’s important to do your research before investing. However, if you’re looking for a way to add real estate exposure to your portfolio, REITs are worth considering.
What is a mortgage REIT?
A mortgage real estate investment trust, or mREIT for short, is a type of investment vehicle that primarily invests in mortgage-backed securities (MBS). Mortgage-backed securities consist of bonds backed by a pool of mortgages. mREITs use leverage to finance their MBS portfolios, which magnifies the effects of both positive and negative changes in MBS prices.
mREITs are subject to interest rate risk and credit risk, as well as prepayment risk – the risk that borrowers will prepay their loans faster than expected – which causes the mREIT’s cash flow to decline. For all these reasons, mREITs can be quite volatile. However, they can also offer high yields, which makes them attractive to high-risk, high reward-seeking investors.
What is a residential REIT?
A residential real estate investment trust is a company that owns, operates, or finances income-producing residential real estate. Residential REITs specialize in properties used as personal residences, such as apartments, single-family homes, and manufactured housing communities.
As with other types of REITs, residential real estate investment trusts offer investors the potential for high dividend yields and long-term capital appreciation. While there are many different types of residential real estate investment trusts, they all share the common goal of providing reliable income and returns for shareholders.
What is a public REIT?
Public REITs trade on major stock exchanges and are subject to the same regulations as other publicly traded companies.
While most real estate investment trusts are corporations, some are structured as trusts. A public real estate investment trust typically has a portfolio of properties that generate rental income. They may include properties under development or redevelopment.
Public REITs often pay high dividends, which makes them attractive to income-seeking investors. However, they can also be volatile, so it’s important to do your research before investing in a public real estate investment trusts.
What is a private REIT?
A private REIT is a company that owns and manages income-producing real estate, but not publicly traded. Unlike publicly traded real estate investment trusts, which are listed on stock exchanges, private REITs are not subject to the same level of regulation.
As a result, they can be more volatile and risky investments. However, they can offer higher returns. For these reasons, private REITs are often favored by institutional and accredited investors.
If you’re thinking of investing in a private real estate investment trust, be sure to do your homework first. Work with a financial advisor to get a better understanding of the risks and potential rewards, if you need to.
Interested in investing in REITs? Check out the Best Canadian REITS for 2022 here.
How is REIT income taxed in Canada?
How real estate investment trust income is taxed depends on the type of income you received. The income classifies as investment income, not employment or other income. In general, these are the investment income categories in Canada:
- Dividends. If you’re paid dividends from your REIT, then it would fall under this category. In Canada, dividend income is grossed up then you receive a dividend tax credit.
- Taxable capital gains. A capital gain, or loss, arises when you sell an investment. The amount is the difference between the sale and purchase prices. You will have a capital gain or loss if you sell your REIT. Only 50% of the gain or loss is taxable. If you have a loss, you can only apply the amount against other capital gains. The loss cannot be applied against other income, unfortunately.
- Interest and other investment income. Any interest earned on your real estate investment fund or another kind of income would fall under this category.
The rate of tax you pay depends on what tax bracket you fall into and your province or territory of residence. Throughout the year, be sure to track the income you receive from your REIT investments into these categories. When tax season rolls around, you’ll have an easier time!
How do you qualify as a REIT in Canada?
If you’re interested in founding a real estate investment trust of your own, there are various items to consider. Before starting, you’ll have to decide what kind of REIT you want. What kind of real estate will you invest in? Where will the capital come from to purchase property? Do you want a corporation or trust structure? Would you prefer public or private trading? Who will be on your team to manage the investment?
Once you have a plan in place, these are the general regulations you must abide by:
- Create contracts. REITs are subject to contract and trust laws in Canada. A contract is created between the real estate investment trust and investors. Having an iron-clad partnership contract before opening up your doors to investors is essential.
- Corporation or trust establishment. You must set up a corporation or trust to qualify as a REIT.
- IFRS reporting. If your real estate investment trust is publicly traded on a stock exchange, you must abide by IFRS accounting standards. This may mean you need to hire a professional accountant to help you. Your IFRS financial statements must be available publicly and published periodically, usually quarterly.
- Income Tax Act requirements. The ITA has various requirements for REITs to follow in Canada.
The process of setting up a financial instrument, such as a REIT, is always complex and outside the scope of this article. Be sure to receive professional advice during the process to ensure everything is legal and legitimate.
Are Canadian REITs a good investment?
REITs are a great way to invest in the Canadian real estate market without having to own property directly. They offer numerous benefits, including high dividend yields and the potential for capital appreciation. And while there is no guaranteed rate of return, historical data shows REITs have outperformed the stock market over the long term.
So, what can investors expect in terms of returns?
Unfortunately, there is no simple answer. Returns vary depending on the type and quality of the real estate investment fund, as well as economic, political, and other similar conditions. That said, investors can typically expect to see an average annual rate of return between 2% and 10%.
However, it’s important to remember that past performance is not necessarily indicative of future results. It’s merely a benchmark for your consideration. As with any investment, there is always some degree of risk involved. But for those looking to take advantage of the many benefits of REITs, the potential rewards outweigh the risks in the long run.
A REIT is an investment vehicle that allows individuals to invest in large-scale real estate projects. Real estate investment trusts are popular in Canada due to the high average returns they have historically generated. While the average return on a real estate investment trust in Canada ranges from 2% to 10%, it is important to keep in mind that past performance does not always predict future results.
As with any investment, there is always the potential for loss. However, REITs can offer a way to diversify one’s portfolio and generate more income than other types of investments. For these reasons, they continue to be a popular choice among Canadian investors. Before investing in any real estate investment fund, be sure to do your due diligence and research the risks involved.