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What is a REIT?

22 January, 2012 / by marketing

So often on this blog we talk about investing in real estate. But most of that time, we’re referring to taking out a second mortgage for an investment property, or taking part in the elusive “flipping” of properties that is just now becoming popular in Canadian real estate. But if you’re not interested in doing handywork yourself, and you don’t really want to deal with tenants, there’s another kind of real estate investment that might be right for you – those are REITs.

REIT stands for “Real Estate Investment Trust,” and while it’s a trust, it works much like a mutual fund – with the exception that this one is only for real estate. When you buy a REIT, your money is put into a large pool of money. With this money, REIT investors may invest in either commercial or apartment/condo buildings. The units within those buildings are then traded on the stock exchange and bought and sold. The value of those units will also rise and fall, just like anything else on the stock market. And so, the REIT holder will also experience gains and losses.

When an investor wants to pull out of their REIT entirely, they can move the money to another investment vehicle such as an RRSP or a RRIF. So why wouldn’t the investor just put their money there to begin with? For starters, with a REIT you have the potential to make much more money than just putting your money away in an RRSP for a certain period of time. Also, REITs are much more liquid than RRSPs or RRIFs, meaning that when you want the cash it will be there and you won’t have to pay a whole ton of money in order to pull it out.

There was a lot of REIT activity in December of 2011 when the Canadian government changed the rules of REITs, but they were all rules that made it easier for the investor. Of the rules, the one to make the most impact changed the definition of ‘real estate investment trust’ when they removed the distinction of foreign properties. This means that where the property is located will no longer matter, whereas before an investor’s portfolio had to show at least 75% of REITs had to be within the country. This new regulation was implemented so that Canadian investors could better compete with foreign investors.

You don’t always need to be buying properties or taking out home equity loans in order to be an investor in real estate. Sometimes, all you need is a REIT portfolio and an ability to let someone else do all the heavy lifting. REITs can be a great real estate investment and if you’re interested, make sure you check out our mini-series that will start tomorrow. In the miniseries we’ll delve into the world of REITs and put them under close inspection – looking at the different types, the benefits, and of course, the risks they might hold to the investor.