Maximizing Your Real Estate Investment

As the economy grows stagnant and job creation seems to become a breakeven proposition, more and more people are looking toward their investments to either get them through those tough economic times or to plan for early retirement.

One such avenue of speculation is real estate. Real estate is a proven long-term performer and many homeowners will tell you that you can’t really go wrong with owning property. Sure, property values fluctuate according to other economic pressures, but in the long-term, you end up ahead.

Now, most of us will own one property or maybe two concurrently over our lives — the family home and the cottage, for example — and in most cases, we’ll leave to our children to cash in on their increased value after we’re gone.

However, there is the opportunity to invest in real estate without owning property, through an REIT.

A Real Estate Investment Trust is like a mutual fund (where investors put money into a pool and a manager or management team decides how to allocate it toward assets), only revolving around real estate holdings instead of stocks. REITs are created by companies that own commercial, industrial and residential properties — apartments, condominiums, office buildings, hospitals, shopping centres, etc.

The fund manager brings in new assets, moves out underperforming ones and tries to make as big a financial gain for investors as possible.

The investor is able to take advantage of increases in property values, without the limits of investing in only one property at a time — most notably, liquidating the fund in whole or in part and getting your money within a couple business days (unlike attempting to sell off property, which you must do all at once, unless you can parcel off land, and you have to wait around for the right buyer to come along) — and is therefore able to take advantage of fluctuations in the marketplace in order to realize long-term financial growth. As with mutual funds, some REITs underperform in the short term because that’s when real-estate is most vulnerable to economic trends.

And yes, they took a hit during the financial crisis in 2008, but they rebounded quite well in the years since.

There are important things to look for when considering an REIT: past performance (although that is not a guarantee of future performance), tenant turnover and financing due dates (lease and mortgage terms, etc.).

There are more than 400 REITs available in some 40 countries, so there are opportunities to invest in offshore properties (again, in a manner similar to investing in mutual funds). There are about 40 Canadian REITs in the commercial, health care, hotel, industrial, office space, shopping mall and residential sectors. And like mutual funds, there are diversified REITs that cover more than one sector.

In Canada, as in other countries, REITs must adhere to a set of regulations different from other investments, and the government is often closing loopholes and changing regulations to insure the protection of investments. Primary among the regulations is that a high percentage of the REIT’s investments must be physical property (no less than 90 percent, in Canada). The minority holdings can be mortgages, mutual funds, stocks, bonds, etc.

And they are RRSP and RRIF eligible.

Although a complete investment on its own, an REIT can also become an important part of a diversified portfolio, so the investor is never at the mercy of the collapse of one economic sector, but is able to offset losses in one with gains in another.