REIT (pronounced reet) stands for a real estate investment trust. REITs are trusts that passively hold interest in a property or properties. It is a publicly traded organization that allows investors to pool their money to invest in income-producing real estate.
REITs can be attractive investments because they yield similar returns to owning investment property without the headaches of maintaining the property – and with more investors. It is a more affordable investment option than trying to secure an income property on your own.
REITs were only introduced in Canada in 1993, based on a similar model that the United States adopted in the ‘60s. While Congress created REITs in the United States to give individual investors a chance to participate in the real estate market, their introduction in Canada was in response to an economic crisis.
How to Qualify as a REIT in Canada
REITs are the only category of income trusts still able to pay distributions before they pay taxes. A 2011 law put an end to that privilege for other income trusts, but allow it for REITs provided they meet the following requirements:
- Can only hold qualified REIT properties at any time during a tax year
- Minimum of 75% of the trust’s revenue in a tax year must come from the rent, mortgage, interest from real or immovable properties in Canada, and capital gains from selling such properties
- Minimum of 75% of the total fair market value of all the trust properties held by the REIT must be in Canada
Tax Benefits of REITs
Income trusts in Canada qualify for special tax treatment. When income flows through to the trust’s unitholders, they pay less or no corporate tax. With some distributions qualifying as a tax-free return of capital, investors only pay tax on the rest of the distributions as regular income. Classifying REITs as an income-trust business means they are also exempt from income trust tax
Types of REITs
There are two types of REITs.
These make up the majority of REITs. Equity REITs own and manage properties. These can be specialized into specific niches, or remain more diversified focusing on specific target markets. Examples of property types invested in include, but are not limited to:
- Apartment buildings
- Single-family homes
- Shopping malls
- Strip Malls
- Medical centres
- Office buildings
Equity REITs make money by buying properties and leasing those properties to tenants – creating an income stream that passes to its shareholders as dividends. As property values increase over time, so does the value of your investment.
Less common, and with more risk mortgage REITs invest in mortgage-backed securities. They invest in:
- Agency mortgages
- Non-agency mortgages
- Commercial mortgages
Mortgage REITs make money by borrowing at low short-term interest rates and buying mortgages that pay higher long-term interest rates. The profit is the spread between the two rates. With market fluctuations, this is a more risky investment, as you could stand to lose if the interest rates fall out of your favour.
An equity REIT might be right for you if your goal is to create a growing dividend stream while increasing shareholder value through rental income and property appreciation.
If you would like more information about REITs or assistance in determining if this is the right kind of investment for you, then contact our office today.