Investing in real estate investment trusts (REITs) could protect investors from a likely crash in the housing market, an expert said.
The pace at which property prices are increasing in some of the hottest cities in Canada might indicate an imminent crash, said Adam Othman, a value investor and a contributor at The Motley Fool. He said Canada remains one of the housing markets globally with high vulnerability to a price correction.
"A market crash can see a significant correction, which translates to a potentially devastating impact on our financial situation," he said.
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Still, real estate continues to be one of the most valuable assets to invest in. In an expectation of a downturn, however, it would not be practical for investors to purchase any properties. This could only expose them to further risks, Othman said.
Investing in REITs allows investors to stay in the market while minimizing risk.
"A REIT can help you mitigate the effects of a housing market correction without the need to move away from the potential gains of the real estate industry. A REIT does not just give you exposure to the real estate sector. The REIT also makes it more accessible," he said.
Shares in REITs are sold like stocks and provide liquidity that investing directly in properties cannot give. Furthermore, REITs allow investors to be exposed to different property types. With this diversification, risks are reduced.
"The REIT owns properties in the real estate sector, and as a shareholder, you own part of the trust. REITs are required by law to distribute earnings to shareholders," Othman said.
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