Be a landlord, without the headaches
REITs offer access to real estate investing without the drama that comes with rental properties
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Hey there, time traveller!
This article was published 04/06/2016 (2308 days ago), so information in it may no longer be current.
Mark Seed used to be a landlord. But the headaches of dealing with the tenants, maintenance costs, and the condo board proved to be too much.
“There’s more to it than handing over your money to a property management company,” the Ottawa-based project manager and personal finance blogger says. “Over time, my wife and I felt buying it wasn’t the best decision for us.”
Even selling took more time than anticipated.
“It’s not like a stock where you could sell it the next day because you weren’t happy with the performance.”
Yet, Seed remains a real estate investor. Besides owning a home, he also holds a portfolio of real estate investment trusts. Commonly called REITs, these are stock-market-traded funds containing different types of property — from multifamily residences to shopping malls to skyscrapers to seniors homes.
For the “real estate curious,” REITs are an ideal investment vehicle to get their feet wet without having to take on as much risk and the workload associated with being a landlord.
Though it’s hard to know for certain, it’s safe to say few Canadians with a little extra cash haven’t considered becoming a landlord after watching real estate appreciate dramatically in the last decade.
Winnipeg home prices, for example, have almost doubled since 2007, according to the Canadian Real Estate Association.
Most people know someone who owns a rental property or has been pondering it — even Seed.
“It is familiar water-cooler talk: ‘I’ve got all my money in GICs and I’m thinking about buying a condo downtown and renting it out,’” said Seed, who has written about real estate investing on his blog (www.myownadvisor.ca).
“So they’ve got one part of the portfolio that is ultra-conservative, and yet they’re gung-ho trying to be a Donald Trump real estate mogul.”
Part of what drives interest is people like real estate because they can touch it and, more importantly, understand it. Yet, people often overlook the obvious risks: most times, you’ll need to borrow a lot of money.
Paradoxically, these same investors probably get queasy at the idea of investing in the stock market, let alone borrowing money to invest in it.
Stock market analyst Scott Clayton of the personal finance website the Successful Investor (TSI) Network says “some people find that managing a piece of property is an appealing hobby,” and it can be lucrative.
Given residential real estate’s long run up in prices, new investors are likely to see reduced capital appreciation of a newly purchased property. If that turns out to be the case, the required work — finding tenants, collecting cheques and maintenance — can be even more arduous.
Of course, REIT profits aren’t guaranteed either. REITs mitigate risks through diversification. Rather than owning one property, you own many across different sectors and geographies. You can even buy REITs that hold Winnipeg properties (so you really can touch what you own).
One of Canada’s more popular REITs is headquartered in Winnipeg and holds significant local assets. Artis REIT has several local properties including the skyscraper 360 Main and Shops of Winnipeg Square, and 2190 McGillivray Blvd. (Cineplex’s VIP cinema).
“When location and economic fundamentals are properly assessed, real estate will always be a good investment,” said Artis CEO Armin Martens.
Moreover, unlike the residential home market, REITs are somewhat undervalued.
“Currently, the majority of TSX-listed REITs are trading at a discount to the value of their underlying real estate,” he said. “In addition, REITs offer excellent liquidity, conservative balance sheets and, in many cases, an investment-grade credit rating.”
Of course, they involve risk — though “no different than other investment products,” Martens says.
A REIT can fall in value due to a variety of factors. An economic slowdown can depress prices due to slackening demand from buyers and tenants; interest rate hikes increase the cost of borrowing for REITs, which can also hurt profitability. Others may have a sector-specific or geographical risk.
For example, H&R REIT holds a lot of Calgary office space and consequently took a small hit to its unit price in the wake of the collapse in oil prices, Seed says.
Yet, overall, REITs offer many advantages investors can’t easily get elsewhere. For one, they allow small investors to buy a stake in assets they would have no means to do so otherwise, such as office towers, shopping malls, warehouses, industrial parks and apartment complexes.
They also provide a steady income (potentially with a moderate capital gain over time). REITs listed on the Toronto Stock Exchange generally pay at least four per cent distributions (Artis pays more than seven per cent). They also pay more frequently than other investments: monthly instead of quarterly or annually.
REIT distributions can be complicated from a taxation perspective.
For this reason, Seed suggests holding them in a registered account such as an RRSP. Best of all is the TFSA.
“It can be a perpetual cash machine,” he said about the ability to earn monthly tax-free cash from a REIT in a TFSA.
“Again, nothing is guaranteed, but based on some of their histories it’s a pretty attractive trend.”
Take Rio Can, Canada’s largest REIT. It pays a five per cent yield and while it has not increased its distribution or capital value dramatically in the last 10 years, Rio Can has managed to weather storms such as the Great Recession. And it has consistently paid investors a slowly growing monthly income.
“The best of the REITs have good management and balance sheets strong enough to weather economic downturns,” Clayton said, adding Rio Can is among them. “They also have high-quality tenants, and they carefully match their debt with their leases.”
That doesn’t mean going all-in with REITs, however. About 10 per cent of the portfolio should do the trick to provide a steady income. As a side benefit, investors can expect REITs to add buoyancy to their portfolio in downturns as they do not fall as much in value as most common stock in bear markets, Seed says. “Still, with moderate returns come moderate risks.”
The risks are far less than those — and workload — associated with owning an investment property yourself, Seed says.
“I don’t really want an income property where I’m getting phone calls at 3 a.m. from tenants with an emergency — I don’t need those headaches,” he said. “Other people are willing to take that kind of work on and it can and does work out, but I’m more a ‘slow-and-steady-wins-the-race’ kind of investor, so REITs work just fine or me.”