Best Private Reits To Invest In

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Reit Dividends And Tax Implications

Is Investing In A REIT Worth It? REIT Investing (Real Estate Investment Trust)

The dividends received from investing in REITs can turn into a powerful wealth-building vehicle. Done correctly, theres no reason investors couldnt supplement their entire income with annual dividend payments. However, there are tax implications which cant be ignored. Dividends are viewed as income, and Uncle Sam will want his cut at tax time.

Individual shareholders who receive dividend payments must report their profits to the Internal Revenue Service . With a few exceptions, dividends received over the course of the year are treated as ordinary income and will be subject to income tax. However, Matt Frankel at Millionacres suggests there is a great way to simultaneously compound profits and shelter dividends from taxes.

According to Frankel, tax-advantaged retirement accounts are ideal for REIT investing. You wont have to pay any taxes on your dividends in an IRA or other retirement account, so your investment can compound much more over the years. On the other hand, REIT dividends can have a complex tax structure, so they can complicate your tax situation if held in a standard brokerage account.

In 2020, single investors who make less than $40,000 a year wont have to pay a long-term capital gains tax. Individuals who make between $40,001 and $441,450 will be subject to a 15.0% long-term capital gains tax. Single investors who make more than $441,451 will pay a capital gains tax of 20.0% on their dividend income.

What Are Publicly Traded Reits And How Do They Work

Publicly traded REITs are regulated by the SEC, and they are traded in the major security exchanges. Individual investors can buy and sell shares of publicly-traded REITs on the public securities exchange such as the NYSE. Publicly traded REITs come with the following characteristics:

1. Availability of information

Since publicly traded REITs are traded in public securities exchanges, there is easy access to performance information about the shares of a public REIT. The information is provided by the company that owns and trades the REITs, as well as independent firms that actively analyze REITs.

Also, REITs are registered and regulated by the SEC, which requires them to file their audited financial statements with the regulatory body. Interested investors can then access the information on the SEC website.

2. Who can invest

Individual and institutional investors can buy and sell shares of a publicly-traded REIT with a minimum investment of one share and the current share offering price. When buying through brokers, investors are charged an upfront fee, and the fee would be the as same as they would pay in any other public REIT.

3. Minimum investment

The minimum investment for a publicly traded REIT is pretty modest. However, the initial investment may vary from company to company.

4. Liquidity

Rez Ishares Residential Real Estate Etf

All the preceding REIT ETFs hold mostly commercial real estate. To specifically target residential, healthcare, and public storage REITs, the iShares Residential Real Estate ETF is a great choice. This ETF seeks to track the FTSE NAREIT All Residential Capped Index and has an expense ratio of 0.48%.

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One Of The Best Canadian Reits To Buy Undervalued Today

Because real estate is such a great long-term growth sector, and because its generally quite reliable, most of the best Canadian REITs are fairly valued.

However, if youre a value investor looking to buy a high-quality REIT while its trading at a discount, Boardwalk REIT is a stock that offers tons of value today.

Boardwalk is a residential REIT with more than 60% of its portfolio in Alberta. And because the Albertan economy has seen some struggles for years, Boardwalk stock has suffered as a result. Of course, the energy industry suffered through the pandemic, as oil prices tumbled and production was curtailed. But it was also suffering prior to that after oil prices fell back in 2015.

Lately, though, the Albertan economy has been recovering well, and Boardwalk itself has made some high-quality acquisitions, as its recycled capital. Plus, its beaten the streets expectations for 11 consecutive quarters now, showing that its performing well, despite macroeconomic headwinds.

So, with the stock trading at a price-to-funds from operations ratio of less than 25 times, not only is it below the average of other residential REITs, but you could argue its the most undervalued of all its peers.

With the stock performing well, and the economy recovering significantly, it may not stay cheap for much longer. Therefore, if youre looking for one of the best Canadian REITs to buy ahead of 2022, Boardwalk deserves some serious consideration.

Schh Schwab Us Reit Etf

Reitsmarket

Another low-fee option for U.S. REITs is from Schwab the Schwab U.S. REIT ETF. It launched in 2011 and has over $6 billion in assets.

SCHH can be considered comparable to VNQ above and is conveniently cheaper by 5 bps. Its actually the cheapest ETF on the list with an expense ratio of 0.07%. This ETF seeks to track the Dow Jones Equity All REIT Capped Index, excluding mortgage REITs.

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More Real Estate Investments Curated By Benzinga

Becoming more familiar with real estate investing and its benefits will lead any investor to want to explore even more options. Here is a list of additional great investment opportunities to check out:

  • More Details

At this time, there are a total of about 1,100 REITs both public and private. About 800 of those are assumed to be private REITs, as they are not registered with the SEC.

Investing In Reits In Canada

Investing in REIT stocks can be a great option in your portfolio. The business model is very clear for almost anyone to understand. Also, it is easy to see what your investment is doing, and where it goes always a plus when investing.

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How To Invest In Private Reits

Investing in private REITs can be a risky, expensive proposition. Minimum purchase amounts can run as high as $25,000 or more, which is why theyâre generally only available to accredited investors.

Private REITs are sold via broker-dealers or may be investment options offered to well-heeled investors by their wealth managers. They are highly illiquid, meaning you may only be able to sell a portion of your holdings at certain times each year, and they may charge high annual management fees in addition to various sales fees.

Because private REITs donât have to register with the SEC, thereâs often little to no data available for tracking the performance or even holdings of private REITs. This makes them particularly risky for investors with limited financial means or risk tolerance.

Narrow Down Your Canadian Reits

Real Estate Investment Trusts (REITs)

I decided to eliminate the little players. They may well have a lot of growth but I want an established REIT of at least $1B in market capitalization. With that criteria, they can have funds to expand and play in the big cities. That leaves us with the following REITs.

Ticker
10 84

For the purpose of my selection, I will go with $1B as a minimum market capitalization. I am going to exclude the industrial REIT industry as I dont understand that industry. For example, the healthcare REIT industry is also not an industry I understand.

There is definitely a growing market but I am not sure how the business model works. It leaves me with the list below sorted by market capitalization.

Ticker
84

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Tax Advantage Which Lets You Keep More Of Your Money

REITs are widely used because of their highly favorable tax advantages. As mentioned before, REITs are required to distribute 90% of their earnings to investors, which allows them to avoid paying corporate income tax on profits they distribute. This benefit trickles down to investors when their dividends are not double-taxed, they can receive the maximum amount of capital from the REIT.

Private REITs are even more advantageous. One of real estates greatest tax benefits is depreciation. And because private REITs are LLCs, this depreciation can be passed through to individual investors. Because you get to offset your income with the depreciation tax deduction, you might be earning $10 per share, but only paying taxes on $7, as an example.

The second primary advantage is long-term capital gains. If you hold an asset for a year or more, you will pay long-term capital gains tax, which is much lower than ordinary income.

Private REITs can also pass through a myriad of other tax-advantaged situations, like Opportunity Zones and 1031 Exchanges to name a few. Because LLCs are pass-through entities, 100% of the tax benefits are automatically passed through to the investors.

On the other hand, dividends from a public REIT are taxed as ordinary income, so investors never get any tax breaks.

Winner: Private REITs

You Dont Need To Be A Farmer To Invest In Working Land

An investment in farmland separates your money from the whims of the market more than just about any other real estate venture, making it one of the best diversification buys youll find. According to AcreTrader, farmland earns you money in two ways through land appreciation and annual cash rent.

The average annual return is a mighty 11% and farmland investors enjoy famously low volatility. Not only is it a hard asset that provides a hedge against inflation, but its an investment that lets you build equity over time.

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Publicly Traded Reit Stocks

This kind of REIT is registered with the SEC and trades publicly on major stock exchanges, and it probably offers the best chance for public investors to profit on individual investments. Publicly traded REITs are considered superior to private and non-traded REITs because public companies usually offer lower management costs and better corporate governance, because public companies are subject to disclosure and investor oversight.

Risk: As with any individual stock, the price of REIT stocks can decline, especially if their specific sub-sector goes out of favor, and sometimes for no discernible reason at all. And there are also many of the typical risks of investing in individual stocks poor management, bad business decisions and high debt loads, the latter of which are especially pronounced in REITs.

Investing In Reits Vs Real Estate

The Simple Guide To REITs: How To Invest In Real Estate With Less Risk ...

REIT investing allows investors to tap into the potential of the real estate industry without actually buying any physical assets. Instead of buying properties, those investing in REITs can actually invest in companies that invest themselves. REIT investors can capitalize on a market that has performed historically well without actually buying property and instead of buying what are essentially stocks traded on Wall Street. Except for a few years, annual REIT returns have actually outpaced the S& P 500, dating all the way back to 1972.

Physical real estate will place a lot more control in the hands of the investor. Real estate investors naturally have a larger role in their own investments, which means their success and failure are mostly dependent on their own actions.

Despite the less-passive approach, physical real estate investors have proven flipping can produce attractive returns. According to Attom Data Solutions, Homes flipped in the first quarter of 2020 were sold for a median price of $232,000, with a gross flipping profit of $62,300 above the median purchase price of $169,700. That gross-profit figure was up from $62,000 in the fourth quarter of 2019 and from $60,675 in the first quarter of last year.

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Year Comparison Of Canadian Apartment Properties Reit Vs Tsx

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.

Mathieu Litalien

About the author

Mathieu is an individual investor and has been investing part-time for the better part of the past 20 years. He is primarily interested in fundamental analysis, focusing on the long-term and his portfolio is composed primarily of dividend-paying equities. Mathieu has a moderate risk profile and also looks for growth and value. His passion for finance and the markets have led him to his MBA and writing for Seeking Alpha and Stocktrades. Mathieu also focuses primarily on stock research and content production for Stocktrades.ca Premium and the Stocktrades blog.

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Reason #: Reits Can Do Spread Investing To Accelerate Growth On A Per Share Basis

At times, REITs may trade at a premium relative to the underlying value of the real estate they own.

In such cases, REITs can earn an “arbitrage profit” by selling equity on the public market and investing that cash into more properties.

If your cost of capital is 4%, but you are buying properties at a 6% cap rate, you earn a 2% that grows your cash flow on a “per share” basis, even despite an expanding share count.

That’s how REITs like Realty Income have managed to earn 15%+ annual returns for decades despite following a simple strategy of buying Class A net lease properties at 5-6% cap rates. Typically, investors who buy such assets are happy to earn a ~10% annual return in the private market. Realty Income has done a lot better in large part thanks to spread investing, which boosted its total returns.

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Reason #: Reits Have Much Greater Bargaining Power With Tenants

Because REITs are large and well-diversified, they also have much more bargaining power with their tenants.

Individual landlords commonly fear hiking rents on their tenants because it may cause them to leave. This would be a major issue for them since they often own only one or a few properties and cannot afford a vacancy.

REITs, on the other hand, can be a lot more aggressive in making sure that they get fair market rent since they are diversified and have the resources to rapidly lease space if needed.

A lot of REITs are so large that they can afford to spend money on nationwide advertising on TV, billboards, or online. As an example, Public Storage commonly has TV ads for its facilities. As the owner of a single self-storage facility, you couldn’t afford that.

Liquidity Can You Get Your Money Out When You Want It

My Conclusion On Investing In REITs – Good Returns For Long-Term Investors

One of the greatest features of REITs is their high liquidity. Like the stock market, there is an active public market where you can easily cash-out your position and access your funds. This is beneficial for investors who want to cash out at a moments notice.

Private REITs cant compete with public REITs in this category, as liquidity in private REITs is limited by internal cash flow, such as earnings or new investors. Most of the time, private funds and syndications have long lock-up periods where investor capital is inaccessible, usually in the 3- to 10-year range. This isnt inherently bad, as many investors overestimate their need for liquidity, however, there are also several private real estate funds, like ours, that have liquidity built into their offerings.

Winner: Public REITs

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Summary Of Private Vs Publicly Traded Reits

Illiquid Liquid

The decision of whether to invest in a private REIT or publicly traded REIT depends on the investors goals and risk tolerance level. For example, an investor looking for a more liquid investment would go for a publicly traded REIT since they can buy and sell its shares with relative ease in the securities exchange.

However, if the investors goal is to invest in a REIT that is not affected by the volatility of the stock market, private REITs would be a preferred choice.

The Best Canadian Reits Have Strong Debt To Asset Ratios

Most Canadian REITs tend to hang out at a 50% debt-to-assets ratio. Many are lower, but thats usually because the REIT plans to borrow to fund expansion plans. The ones that are higher are usually trying to pay down debt, something a REIT will usually do by selling non-core assets or issuing units.

Now that weve gotten that primer out of the way, lets take a closer look at 6 of the best Canadian REITs, the kinds of companies that should provide a combination of solid distributions and some impressive capital gains as well.

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How To Invest In Public Reits

Itâs easy to buy listed public REITs, or mutual funds and ETFs that invest in REITs using an online brokerage account. Shares of REIT mutual funds may also be available to purchase in your employer-sponsored retirement account.

Your brokerage offers screener tools to help you evaluate the historical performance, returns and dividends generated by REITs. Researching a REITâs management team is also important. Since a REIT is composed of a managed pool of assets, assessing the managersâ track record is key to understanding if a REIT is a good buy and if its management team is worth its fees.

Publicly traded REITs may have minimum purchases as low as the price of one share. If fractional share investing is available, this minimum may fall to $5 or less, making publicly traded REITs accessible to most any investor. Notably, publicly traded REITs can be bought and sold whenever an exchange is open, making it easy to access the cash value of your investment at almost any time.

What Is A Reit Etf

Guide to Private REIT Investing

A REIT ETF stands for a real estate investment trust exchange-traded fund.

A real estate investment fund ETF invests in a basket of real estate companies that own and operate income-producing real estate, such as office buildings, shopping centers, warehouses, and apartments.

A REIT ETF generally provides investors with exposure to a broad spectrum of the real estate market, without the need to purchase individual properties. The benefits of investing in a REIT ETF include diversification, liquidity, and professional management.

However, real estate investment fund ETFs may be subject to higher expenses than traditional index funds, and they may not provide complete protection from the risks associated with investing in the real estate market.

For more information on ETFs, check out our complete guide here.

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