The REIT Stuff: Sharing The Wealth Through Real Estate Investment Trusts

by Heather McDowell on 19 Dec 2022

Real Estate Investment Trusts, or REITs, leverage the capital of numerous investors making it attainable for single investors to earn a profit from property investments—without having to purchase, manage or finance any properties directly, themselves.

REITs purchase and develop properties in order to operate them as part of their own investment portfolio.

Private real estate investment trusts can consist of a wide variety of real estate assets in their portfolio including office facilities, apartment buildings, warehouses, retail centres, medical facilities, industrial and hotels. 

Most REITs focus on a singular property profile, such as multifamily residential, but some hold multiple types of properties in their portfolios.

Two REITs Don’t Make a Wrong

There are two main types of real estate investment trusts: those that are publicly traded, such as those found on the Toronto Stock Exchange (TSX) or the Alberta Stock Exchange (ASE), and non-exchange traded REITs. These are colloquially called non-traded, private placements, or merely private REITs.

Oversight of real estate investment trusts falls to Canadian securities regulators which bring a high level of governance and transparency to the industry.

REITs are prohibited from holding any property type other than “qualified REIT properties” at any time during the tax year.

At least 75% of the trust’s overall revenue for a tax year must come from rent or mortgage interest from real property in Canada, and capital gains from the sale of such properties.

At least 75% of the total fair market value of all trust properties that the REIT holds must be geographically located within Canada.

The REIT Considerations

We, at Canadian Real Estate Wealth, like to arm our readers with practical tools that can be leveraged for future use.

In that vein, allow us to put a few considerations on your radar when crossing the threshold into real estate investment trusts.

  • Does the REIT purchase when the market is booming or a bit lower? This may seem counterintuitive, but if a REIT purchases a property at the height of the market, it makes profitability that much more elusive because the property must make more money to ‘get into the black’.
  • Has there been any media coverage or chatter about the REIT? Is it positive or critical? We have a bit of a caveat here as we’re fans of steering away from gossip, but an aggregate of the opinions of the experts is one of several lenses through which we encourage prospective investors to consider.

REITs are widely used across each Canadian province and territory. By encouraging capital formation, a real estate investment trust allows small investors to participate in the ownership of all real estate asset types in the same manner as the wealthy do, but with the added opportunity for liquidity.

The Value of Canadian Capital

The Federal government feels the income-trust business structure is appropriate for real estate investment trusts, so it exempted REITs from the income trust tax. Another major benefit is that the capital stays in Canada for the benefit of Canadians.

We connected with Natasha Phipps, Calgary-based realtor-investor and leader of The Phipps Group who recently launched her own private real estate investment trust, WealthShare. WealthShare was crafted from the notion that real estate investing should be accessible to all and good for all. Its mandate is to provide solid returns to investors, quality homes to tenants, and commercial spaces where businesses can flourish.

Why REITs Make Sense

When asked what sparked the launch into the real estate investment trust space, Ms. Phipps noted that it started like many of the other projects she undertakes for her clients; it all started with a conversation:

“Clients with money tied up in TFSAs and RRSPs were wondering how they can deploy these in a way that makes sense. Whereas they saw cashing these in as the only option. When speaking to investing in a REIT, we reminded our clients that they’re not cashing those investments in but self-directing them into the types of funds they may be more interested in and makes a positive impact on the local economy.”

Why Calgary is right for REITs

Since WealthShare started in Alberta but intends to expand out into other provinces, Canadian Real Estate Wealth asked Natasha Phipps what makes for a good market in real estate investment trusts. She noted that a good market is one that has sustained some measure of stability.

While all real estate ebbs and flows, Ms. Phipps advises against investing in markets where the real estate pendulum swings dramatically.

Wherever you’re looking to invest, “you must first look at where people are going. Real estate is a business of the movement of people.”

Calgary is a great place for properties of a REIT because of the focus on diversification, Phipps posits. The energy sector is not going anywhere, and the technology sector is steadily growing.

“Tech touches other areas as well. What is great about Calgary is its good existing workforce. Businesses making their head office here attract talent. Calgary has a lower cost of living and the highest median wages. There are also the business advantages of lots of office space and lower cost of operating. This means more money in everyone’s pockets. With higher inflation rates making affordability more and more of a concern- this continues to be our advantage here in Calgary.”, explains Phipps.

In conclusion

A real estate investment trust may prove to be an innovative performance-forward way to start down the real estate investing path or as a way to bring liquidity to your portfolio. However, like most things in life, caveat emptor. Not all REITs are made equal.

If you’re looking for a place to start, reach out to Natasha Phipps at [email protected] and have a conversation about Real Estate Investment Trusts.

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