Thursday, April 22, 2010

REITS a Poor Man's Way to Invest in Real Estate

REITS are corporations that invest most of their assets in real estate. Some REITS specialize in a certain type of property like apartment, commercial, industrial, hotel, hospital, retirement residence etc. Most REITS invest in different provinces to provide some kind of regional diversification.

I personally own a lot of REITS, my TSFA is 100% invested in REITS and my RRSP is about 80% REITS. However the Dividend Lover non registered portfolio does not hold any REITS.
First off, REITS do not pay an eligible dividend. Therefore your dividends are 100% taxable. So REITS should not be held in a non registered account.

They are good in TSFA/RRSP because the REIT Corporation itself does not pay tax. Then since you are holding it in a TSFA/RRSP you do not pay tax either. So the result is a win win win. And whenever you have a win win win it usually means that government is losing.

I'm not going to go into too much detail explaining what REITS are you can find 100 other blogs to explain that. What I'd like to do here is to voice my opinion on investing in REITS vs. straight out investing in real-estate.

Now REITS are corporations, so they have cheaper access to capital than you personally would when you buy real-estate. However these savings are offset by the salaries payed to management. On top of that this is only true for owning commercial or industrial properties.

Interest charged by banks on residential properties is much lower than that charged for owning commercial properties. you can personally get a residential mortgage for a lower rate that the largest reit can.

The REITS themselves are leveraged because they issue debentures and have mortgages. However you could personally achieve higher leverage, either by using CMHC financing, or by putting together a creative deal. The most leveraged Reit white rock (WRK.UN) is equivalent to getting 75% mortgage financing.

The REITS are diversified, more liquid than any real property you can buy. That is true.
However REITS do not pass on to you many of the benefits of owning real-estate. Such as being able to write off expenses against the properties income from your car lease, cell phone, etc. The more properties you own the more you expenses you can get away with.

Real property also allows you to take CCA (capital cost allowance) i.e. Depreciation. You could depreciate the property and you the depreciation to offset income, and so defer taxes for years and years. Unlike REITS where you will be paying taxes on your distributions without any deferral.

Therefore it is better to buy properties than to buy REITs. I call them the poor man’s real-estate. Because you do not need much capital to get started. But much of the benefits of owning real-estate are missing.

The bottom line is, only buy REITS in and RRSP/TSFA. Never own them in a non registered portfolio. If you want exposure to real-estate in a non registered portfolio you can buy corporations that invest in real-estate such as killam (KMP) or first capital realty (FCR). Which are not operating as REITs.

1 comment:

  1. You are wrong about 100% taxed distributions. You are also wrong about depreciation and deferral. Most REIT's have RoC as a major component.