What prevents many people from investing in real estate is the large down payment that banks require on a property. If you are planning on investing in real estate there is an alternative way to invest. To invest in a real estate investment trust or also known as REIT. A REIT is an organization that has all their assets in properties and are traded just like stocks on the market. It is up to the individual investor to purchase as many or as little shares of a REIT as they desire. Meaning there are low minimums to enter into the market.
Legally, REIT must give out 90% of its earnings as dividends. If you compare REIT to other stock investments, you will quickly see that REITs give out higher dividends. This is one of the reasons why many dividend investors hold REITs in their portfolio. It is very easy to invest in REIT since you are just buying a share. You do not have to deal with real estate agents or tenants. It is a very passive investment. Investing in a REIT is the easiest way to get into the real estate market without owning a physical property or spending lots of money.
Purchasing a share in the REIT is very easy. You do not need to get a mortgage from a bank. This also has an added benefit of making the investment highly liquid unlike buying physical properties. You can sell REIT quickly if you need money unlike owning a physical property which can take months to sell. The issue is that the dividends are taxed as income. To avoid this scenario it is best to create a Tax Free Savings Account also known as a TFSA.
When investing in a REIT it is important to understand that the prices do not necessarily follow other types of assets. Many REITs will not follow the stock market. However, if investors expect real estate prices to drop then you may see a decline in share value. This makes REIT a good investment when the economy is in a bad position. Sometimes investors expect real estate prices to drop or there to be high vacancy for some reason, this causes the share to be priced in. Where prices drop because investors expect the REIT to perform poorly in the coming quarter(s).
The first investment I ever made was in REIT, at the time I had little money to invest in real estate. REIT was my go to option. It is a passive investment that does not require you to do any work. If you are interested in investing in a REIT make sure to check out their financial statements and understand their distribution of their assets. Depending on the REIT they might specialize in a certain type of asset. Types of assets include residential, retail, office, industrial and other. Furthermore, checking their occupancy rates, high occupancy rates is a good sign. For example, one of the largest REITs in Canada is RioCan REIT, you can visit their website and view their financial statements for free. It is also worth checking out MD&A since it gives your more relevant information.