Investing in real estate can be an attractive option for many individuals looking to diversify their investment portfolios and to generate passive income. However, deciding between investments in direct real estate investment versus investing in Real Estate Investment Trusts (REITs) requires careful consideration of the pros and cons of each investment approach. In this article we will discuss some of the advantages of investing in a REIT:
Four (4) main benefits of investing in a REIT compared to investing in real estate directly:
- Less capital is required for diversification: The minimum investment for accredited investors in private REITs is significantly lower than direct real estate investment (only $25,000 CAD in the case of A+ REIT) which provides a proportional investment interest in an already assembled portfolio of cash generating real estate assets. Generally, the minimum capital requirements for direct real estate investments are significantly higher, also making it more difficult to obtain exposure to multiple properties without significant capital investment.
- REITs may offer greater liquidity compared to direct real estate investments: Private REITs generally provide redemption features to Trust Unitholders providing an ongoing liquidity option. Disposing of direct real estate investments will be more time intensive, unpredictable, and costly.
- Many REITs are registered plan eligible, therefore it is a qualified investment for RRSPs: Many private REIT Trust Unitholders have the option of holding their investment in registered plans such as their RRSPs. Generally, direct real estate investments cannot be held in a registered plan.
- Tax advantaged distributions provide a passive cashflow: REIT investors receive regular distributions from the trust’s rental income, providing a steady stream of passive cash flow. The distributions are generally treated as a return of capital (tax-free), which effectively lowers an investor’s adjusted cost base while deferring taxes into the future.
Investing in a REIT may not suit you if you prefer:
- Active involvement in strategic management: Private REITs are typically managed by a professional asset management company with independent board oversight, meaning unitholders will not be involved in the strategic or day-to-day management of a private REIT. The investment opportunity is better suited to investors who prefer passive income from an open-ended real estate portfolio.
- Short-term investment horizons: REITs, or real estate in general, may not be suited for you if you prefer investments with a short-term investment horizon or if you require near-term liquidity.
In conclusion, both direct real estate investment and investing in REITs offer unique advantages and challenges. Investors should carefully assess their investment goals, risk tolerance, and level of involvement before choosing the approach that best suits their needs. Whether seeking active involvement and control or preferring a more passive, diversified investment strategy, there are options available to meet various investment preferences and objectives.
To learn more about the benefits of investing in a private REIT you can contact a member of our team at https://privatepensionpartners.com/contact/
Disclaimer: The information on this website does not constitute, and should not be construed as, an offer to sell or a solicitation of an offer to purchase securities of any entity. Private Pension Partners Investments Inc. (“P3I”) is an exempt market dealer in all provinces of Canada (other than Quebec), was formed for the purpose of marketing and offering securities of real estate entities managed by the Private Pension Partners group of companies on a private placement basis. Securities will only be offered by P3I in jurisdictions in which such securities may be lawfully offered and sold and only to persons who make appropriate representations to P3I and the applicable issuer of the securities that they qualify as “accredited investors” within the meaning of applicable securities laws and who are resident in one of the provinces of Canada, other than the province of Quebec (and any other jurisdictions in which P3I may become registered in the future).
