A Real Estate Investment Trust (REIT) is an investment vehicle to hold real estate assets in a way that reduces or eliminates the need to pay taxes on the investment. In Canada, a REIT will not be taxed as long as they distribute their taxable income to shareholders. REITs can bundle divided portions of a variety of real estate classes such as retail, residential, industrial all into one package. There are some REITs that focus on a particular class of real estate.
REITs are popular amongst real estate investors as they offer the same income potential as if you held the physical real estate, without the need to be there to
maintain the property fixing plumbing or dealing with troublesome tenants. REITs are traded on the stock market, so are far more liquid than the underlying physical asset.
The drawback of the investment is that because it is so easily traded, the sale price can be very volatile. When there are drops in the market, panic can set in, and the sale price can fall rapidly. So, do not invest in a REIT for the resale price, as you would the physical asset, but instead the cash flow it provides.
So, if you are like the couple I met this week, who are happily renting. They love where they live, but have a big bundle of money laying around that they want to invest in. Everyone tells them to invest in real estate. It’s not necessary to buy a house to invest in real estate, your other option could be to buy a REIT.
