Being a shareholder of real estate investment firms & property investment companies
Let’s analyze how someone would invest in real estate investment trusts, otherwise known as REITs.
[REITs]Q2 hedge fund letters, conference, scoops etc
A REIT is effectively ownership of a bunch of different parcels of real estate that is managed by a company. Generally, they are publicly traded companies and trade on an exchange.
Now, there’s also some private REITs which don’t trade on an exchange, and these REITs are usually structured as a limited partnership.
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Generally, real estate is less correlated to the stock market’s performance. It can provide tax efficient income and it can appreciate over time. So, it’s something that I think most people would agree that they want to own.
The problem is we can’t all go out and buy a bunch of different shopping malls. We can’t just go out and buy a bunch of different apartment blocks either.
In the early 2000’s, investors wanted a way to change this and REITS came along. Real estate investment strategies started gaining momentum in the wealth management industry. With that being said, property investors have been investing in real estate for centuries.
The REITs were popping up and it was a very novel concept at first. They got a lot of traction and it became very popular quickly.
Now why would someone want to own that asset class?
The main reason that I really like it is the tax efficiency, especially in non-registered accounts.
You get what’s called return of capital, which is classified as nontaxable income. In my vernacular here at the office, we call it ROC. ROC is not taxable, it’s classified as return of capital.
You get to depreciate the value of the building against the actual income that’s being collected.
This is usually how it plays out; you have a landlord, you put some tenants in there, you collect the rent, you pay down the mortgage, and the rest of the rent income is effectively distributed to the unit holders.
Two things happen at the same time here.
First, you’re paying down your mortgage over time and you’re paying down your debt that exists on that piece of that parcel of property.
Two, you hope to get some growth over time on the actual value of the building that you bought because you are an owner of real estate.
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When you own a REIT, you’re a shareholder in a trust that owns a bunch of different office buildings, apartment buildings or commercial buildings.
The other neat thing about REITs is that they can get very specific, or they can be general.
You can invest in different REITS: apartment complex, commercial building, office building, industrial infrastructure and the list goes on.
There’s a whole bunch of different categories that exist based on the different needs that people want for investing. REITs provide tax free and tax efficient income. It’s fantastic for non-registered accounts and for corporate accounts as well.
Historically, REITS have shown to be uncorrelated to the performance of the stock market and have proven to be wonders for long-term growth and long-term stability of a portfolio.
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It makes sense for a lot of people. It could make sense for you if you believe in real estate or if you’re the type that always wanted to own an apartment block by yourself
Perhaps you already own an apartment block, but you want some separately managed assets that are managed. Well, a good way to do that is through a REIT, a real estate investment trust.
