Investors can passively invest in real estate by buying units of REITs or real estate investment trusts (just like buying shares of a company). So that they don’t have to deal with tenants. Investors buy REITs mainly for their income. So, REITs are suitable for income investors, and retirees. Some REITs pay out distributions monthly, while others pay quarterly.
Types of REITs
- Equity REITs are the safer kind as they invest in and own properties. They receive rents from those properties and by law, and they pay out a high portion of that as distributions. (Distributions are like dividends.) That’s why, generally, REITs pay out higher distributions than a typical stock.
- Mortgage REITs owns property mortgages. They earn interest from mortgage loans. So, mortgage REITs are the riskier type. That’s also why they sport higher distributions than the equity REITs, sometimes in double digits!
Because I’m primarily a conservative investor, I have only bought equity REITs.
Equity REIT Categories
eREITs can be categorized into retail REITs, office REITs, residential REITs, Healthcare REITs, etc. Some eREITs are categorized by diversified for example if they own properties in retail, office, and industrial.
REIT Distributions act like Dividends but aren’t exactly Dividends
One thing to note is that the distributions from REITs aren’t entirely considered as eligible dividends. If you want to avoid the tax hassle, then, as a Canadian, you would want to buy REITs in the Tax-Free Savings Account (TFSA) or the Registered Retirement Savings Plan (RRSP).
Personally though, I like to buy Canadian eREITs in the TFSA, since I can withdraw from it anytime without any tax consequences. If you plan to reinvest the monthly distributions via DRIP (dividend reinvestment plan), then, it doesn’t matter if you buy the units in the TFSA or RRSP. However, note that Canadians can only DRIP full shares/units (cannot DRIP partial shares/units).
Canadians who buy US REITs will find that they need to pay the marginal tax rate on the distributions if bought in the taxable / non-registered account. I heard that Canadian investors who hold some US REITs in the RRSP won’t have withholding tax on the distributions, that is, they’ll receive the full distribution. However, I can’t be certain that that is the case for all US REITs.