Counting the ways to invest in real estate
Piece of portfolio in property is a good diversification strategy
I run across many people who have become frustrated and disillusioned with investing in the stock market. After all, the 10-year period from 2000 to 2010 was one of the worst in history for stock markets around the world.
Given the low, single-digit returns common during that decade, many investors are looking at alternative investments such as real estate. Here are some different ways to invest in real estate
The most obvious way to invest in real estate is to buy property directly. For most people, this means buying a place, renting it out and selling it in the future.
Some people prefer to buy, renovate and flip property with no intention of renting it out. Some think big, preferring to invest in larger, commercial projects. Some pool resources with others by forming real estate investment groups. As you can see, there are many different ways to buy real estate directly.
REAL ESTATE SYNDICATION
Today, there are many opportunities to invest in syndicated real estate projects. In real estate syndication, a group leader (or syndicator) looks for projects and brings investors together to buy.
With syndication, sometimes investors own individual title and sometimes they own partial shares.
There are many variations of real estate syndication, so investors need to read the fine print before hopping on board. Legal arrangements are usually very complex and most investors I talk to don't really understand the mechanics of the investment.
With syndicated real estate, fees and commissions can also be high, so make sure you know who has the greatest opportunity to make money. (It's often the syndicator.)
REAL ESTATE FUNDS
There are a handful of real estate mutual funds out there. Only two - Great West Life Real Estate Fund and the Investors Group Real Property Fund - have a 10-year track record. Both are massive, with $3 to $4 billion in assets each.
In 2012, the GWL Real Estate fund made a strong return of 16.3 per cent. Over the past 25 years, this fund has given investors a 4.7-percent compound annual return and comes with some risk; it has lost money over a one-year period 27.7 per cent of the time.
Investors should pay attention to the management fees of these funds. They run around three per cent per year.
There can also be a liquidity concern with these funds; the Great West Life Real Estate Fund has had some periods where investors could not access their funds.
REAL ESTATE INVESTMENT TRUSTS (REITS)
A REIT is an entity that buys real property using invested money from the shareholders. A REIT trades on major stock exchanges just like any other stock.
One of the key characteristics of a REIT is that the REIT is encouraged to pay out all or most of the income and profits to the shareholders so the REIT itself does not pay tax. In other words, the dividends and distributions are taxable to the shareholders.
One of the biggest and most well known REITs in Canada is RioCan. RioCan invests in large retail shopping properties.
REAL ESTATE ETFS
Exchange Traded Funds (ETFs) have come a long way and Real Estate ETFs are a great way for investors to put a portion of their portfolio into real estate. The iShares S&P/ TSX Capped REIT Index is the biggest, oldest and most well known real estate ETF. Just like REITs and Real Estate Mutual Funds, investors can buy a portfolio of real estate properties without having to deal with the day-to-day management of owning property directly and dealing with tenants.
Real Estate ETFs are becoming more popular because the management fees are considerably lower than those of real estate mutual funds.
MY FIVE CENTS
This is not an exhaustive list but represents some of the most popular ways to invest in real estate. Remember to do your homework, watch the fine print, know the fees and costs and get help when needed.
I always caution investors away from chasing performance - it often leads to a losing strategy, not a winning one. That being said, having a portion of your portfolio in real estate can be a great diversification strategy.