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Let’s analyze how someone would invest in real estate investment trusts, otherwise known as REITs.
1) A REIT is effectively ownership of a bunch of different parcels of real estate that is managed by a company. Generally, they are publicly traded companies and trade on an exchange.
-Now, there's also some private REITs which don't trade on an exchange, and these REITs are usually structured as a limited partnership.
-Generally, real estate is less correlated to the stock market’s performance. It can provide tax efficient income and it can appreciate over time. So, it's something that I think most people would agree that they want to own.
2) The problem is we can't all go out and buy a bunch of different shopping malls. We can't just go out and buy a bunch of different apartment blocks either.
3) Now why would someone want to own that asset class? -The main reason that I really like it is the tax efficiency, especially in non-registered accounts.
-You get what's called return of capital, which is classified as nontaxable income. In my vernacular here at the office, we call it ROC. ROC is not taxable, it's classified as return of capital.
- You get to depreciate the value of the building against the actual income that's being collected.
4) When you own a REIT, you're a shareholder in a trust that owns a bunch of different office buildings, apartment buildings or commercial buildings.
-The other neat thing about REITs is that they can get very specific, or they can be general.
5) You can invest in different REITS: apartment complex, commercial building, office building, industrial infrastructure and the list goes on.
6) There's a whole bunch of different categories that exist based on the different needs that people want for investing. REITs provide tax free and tax efficient income. It’s fantastic for non-registered accounts and for corporate accounts as well.
