REIT Investing: How to pick a REIT in Canada

Most investors will have a look at REITs at one point in time during their investing journey and picking a REIT is not actually simple.

The yield is usually what attracts investors to a REIT and the strategy is often to find the highest paying REIT that can offer stability but focusing on the yield also a risky approach.

Distribution and yield stability is not actually easy to assess but keep on reading to learn how it can be done.

What Is Real Estate Investing?

Investors wanting to invest in REITs actually are interested in real estate investing with the intention to cash in the rent. Simple, isn’t it?

Say you want to have an investment property as an individual to earn income from the rent. You will ask yourself the following questions:

• Where should the investment property be located?
• Who should the tenants be? Or the type of tenants you want such as working professional, families, or students.

The above will vary based on the funds you can access but they will come up.

What Is A REIT?

REITs are simply an investment vehicle to access real estate investing without the hassle of fixing a clogged toilet.

A REIT is both an investment categorization as well as a type of income trust with specific tax expectations. In general, a REIT has the expectation to pay out most of their taxable income to their investors.

The industry of a REIT can be specific based on their underlying assets as seen below.

The above is a view of the large REITs in Canada grouped by industry.

The big difference between real estate investing and a REIT is that a corporation with directors is in place. With REITs, there is a middleman, a.k.a. directors, between the real estate assets and the investors.

These directors have the expectation to properly manage the company as well as manage the funds efficiently for the benefit of investors. This is where it becomes interesting …

Basics Of Picking A REIT

With the fundamentals out of the way, investors have to consider the following before investing in a REIT.

• The industry you care about as an investor; do you want industrial, offices, or appartments for example? The industry defines your tenants. Who do you want as tenants? You need to read the details of each REIT to know who the tenants are.
• The location of the real estate assets. Location is often key to ensure you get the highest rent and locking tenants for the long term. Where are your real estate assets?

As you can see, the yield isn’t there …

Your theory on each of the industries is quite important. Say you want offices as rental properties; do you believe workers are all going back to work now? If you think apartment vacancies will stay low, maybe consider a residential REIT.

Remember that as an investor, when you invest in a REIT, you are using a REIT as a proxy to hold real estate assets.

Narrowing Down Your REIT Options

Say you believe in the “REIT – Residential” industry and want fo focus on this industry. Below are your available REITs.

Which one to invest in is the next question you have. Once you get through knowing more about the companies and their goals, you have to decide on the best fit for your portfolio.

The average yield for “REIT – Residential” is 2.71% and contains some of the Canadian Dividend Aristocrats from the REIT industry.

The next step is to actually choose one to invest in and is the hardest part. The distribution yield are all similar which leaves you to look at other metrics.

If stability and consistency are important, then InterRent REIT or Canadian Apartment Properties REIT should be considered.

Picking A REIT For Income

Unfortunately, the previous choice of REITs aren’t usually why investors go for REITs. In fact, most investors look for the yield to increase their income.

Why not since REITs are usually referred to as income investments but remember that most REITs don’t increase their distribution and many drop the distribution over time.

Look below at the list of REITs sorted by market capitalization, pay attention to the top Mid Cap REITs which have a market cap of over $2B and look at their distribution yield, it’s not that high. The average is around 3.75%.

Still think that REITs are for income? To get a higher yield, you need to buy smaller REITs which usually increase your risk. The small and micro-REITs give you an average of 5.90% distribution yield.

Still think that REITs are for income? Why take the risk with REITs when investing for income? There are some alternatives such as high income stocks, or covered call ETFs.

While REITs with their underlying real estate assets can be seen as stable, you can generally find similar dividend paying stocks if you are patient and then you benefit from dividend increases to keep up with inflation.

As I build my portfolio around consistent dividend paying companies with good dividend growth, my approach is to stick with the dividend growers such as the Canadian Dividend Aristocrats. The group of REIT Aristocrats still have a yiled of 3.75% on average with the highest around 5.50%.

Selecting a REIT by yield is not how you invest. The above should help you build a portfolio to let you sleep at night!