Some Advantages:
- A small funded investor can get expose to the real estate market
- The yields are high as the distrutions are high as REITs must payout 90% or more of their profits to shareholder.
- Don't have to deal with tenants directly and all the problems that comes with it.
- Managed by experts.
- Some tax advantages depending on the break up of the distribution payments.
Some Disadvantages
- you don't get all the tax breaks if you own rental real estate directly.
- you don't have control over the investment
As you travel around a city and see large commercial buildings, they are, more than likely, owned by a REIT. The tenants of the buildings or section of a buildings sign long term leases with the REIT. The earnings from rent and sales of income producing real estate are passed on to the investors as REITs are required to payout 90% or more of their profits to investors. By doing this they are not required to pay corporate tax.
My first REIT I purchased was Whiterock REIT. My yield on cost was 9.1%. The entire distribution was 100% return of capital so there was no tax on the distributions. The REIT was acquired by Dundee REIT. I decided to redeem my shares at this point. The return of capital that I received was subtracted from my adjusted cost base, there by lowering my ACB. This mean my capital gain was higher as I sold the units had a higher price than what I paid for them. I transferred the proceeds of this sale to my tax free account and initiated a position in Dundee REIT.
Note: Not all REITs have distributions that are 100% Return of capital. So you will have to pay taxes on things like interest. In Canada, the distributions ARE NOT eligible for the dividend tax credit as the REIT doesn't pay corporate tax.
Telus Tower (Calgary Alberta)
owned by Dundee REIT
Being an unit holder of Dundee REIT I own a very small piece of this building and many others.
Disclosure : long Dundee REIT
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