The idea of adding real estate to an investment portfolio is one that many are interested in. However, many investors don’t have the capital required to buy property. In those cases, it might be tempting for them to give up, especially if they can’t get another mortgage to make a real estate purchase.
However, it doesn’t have to be that way. It’s possible to add real estate to your investment portfolio if you decide to make use of Real Estate Investment Trusts (REITs).
What are REITs?
Basically, a Real Estate Investment Trust is a collection of real estate related investments. It can be direct property investments, in which the REIT owns property and makes money off the rents paid, or the interest from different mortgages issued to borrowers. Sometimes, a REIT simply invests in other real estate holdings, such as including storage company stocks, or investing in real estate developers.
One of the advantages to REITs is that they are traded like individual stocks on exchanges. You can buy shares, and add them to any account of yours that allows you to hold stocks. This includes your TFSA, RESP, or RRSP. You can also hold them in accounts that don’t come with a tax advantage. They are easy to trade, and give you access to real estate in your portfolio.
You do need to be aware of the fees that come with investing in REITs, though. You will have to pay transaction fees, though, just as you would when making any other trade. Additionally, there might be other fees. Make sure you understand the fees, as well as the tax implications, before you invest in REITs.
Earn Dividends with REITs
Another reason that there is interest in REITs is due to the fact that they pay dividends. Often, the dividend yields on REITs are fairly generous. So, you can build a regular income stream, in addition to the hope of capital appreciation from the shares that you hold. This isn’t a bad way to go about things.
However, you do need to be aware of some of the risks of owning REITs. As many Americans found out a few years ago, when the real estate market drops, REITs don’t do as well. In Canada, we may soon discover something similar with our situation. Some believe that housing is in a bubble that could burst at sometime in the relatively near future. If that is the case, REITs could end up being a risk in the near term.
Should You Have REITs in Your Portfolio?
REITs are interesting investments that can add a little diversity to your portfolio. It’s possible to invest in REITs from different areas of the world (including emerging markets), as well as in Canada and the United States. If you are looking for geographic diversity, as well as asset diversity, adding some carefully chosen REITs to your portfolio can help.
Just make sure you know the risks involved and understand how REITs work. Otherwise, you might find yourself losing more than you wold like.