Are REITs a good investment for new and existing investors?

Many people want to invest in real estate but are not ready to own property. Some worry about the time, cost, and effort it takes to manage buildings or deal with tenants. The good news is, there is a way to invest in real estate in Canada without having to buy or manage property yourself. 

Real Estate Investment Trusts or REITs offer a simple way to earn money from real estate without owning it. When you invest in a REIT, you are buying shares of a company that owns and manages income-producing properties like apartments, offices, and shopping centres. In this article, Wealth Professional Canada will answer the question: Are REITs a good investment for Canadian investors? 

Introduction to REITs 

Unlike its American counterparts, Canadian REITs had their start thanks to the Income Tax Act of 1986. However, the Canadian REIT market didn’t formally develop until the 1990s, with the first Canadian REIT trading on the Toronto Stock Exchange (TSX) in 1993.  

A real estate investment trust is an alternative to owning real estate properties. It's a pool of real estate assets that individual investors can find on the major stock exchanges. REITs are a lot like mutual funds, but instead of buying and selling shares of stock, shares in real estate properties are traded. REITs offer the more attractive features of stock investing, but without the trouble of owning and maintaining real estate property.  

What makes REITs a good investment? With a REIT, your clients don’t have to worry about collecting rent, constantly finding tenants, paying for utilities, making repairs or renovations, etc. If you’d like a beginner’s guide on REITs to hand out to your clients, here’s an article on how to invest in REITs. 

How does a REIT work?  

A REIT works by passively holding interest in real property. Its owners, known as trustees, possess legal title of and manage the trust property on behalf of the REIT’s shareholders or unit holders. REITs are generally overseen by fiduciary duties, such as those that apply to directors of a corporation. 

While there is no legislation that directly governs a REIT’s organizational structure, the principles of contract law and trust law apply. Trust income can flow through the trust into the shareholders/unit holders’ hands, so REIT income is not taxed at the trust level. 

Are Canadian REITs a good investment now? 

Short answer: yes. The variety of real estate properties that investors can have exposure to is just one of the many interesting benefits of a REIT. Here are some reasons why REITs make a good investment: 

1. No corporate tax 

REITs pay zero corporate tax, regardless of their profitability. This is in stark contrast to most dividend-paying stocks, which are effectively taxed twice: once on the corporate level and again on the individual investor’s dividend payments.  

2. Excellent liquidity 

To retain its status as a REIT, the company that holds a REIT must invest at least 75 percent of its assets in real estate and declare at least 90 percent of its taxable income as dividends to shareholders. REITs must meet these requirements to ensure that the company doesn’t pay tax on the REIT income. 

The net result for investors is the REIT paying dividends, so shareholders can expect income (and it’s not a scam!).  

3. REITs are easily traded 

Part of its excellent liquidity is the REIT’s ability to be easily bought and sold on the stock market. Investors who need money don’t have to go through the painful, lengthy process of finding a buyer if they have REIT shares. 

4. It’s a passive investment 

As a REIT shareholder, your client does not own the property or have mortgages in their portfolio. This means your clients can own income-producing real estate without worrying about maintenance, utilities, collecting rent payments, or other tasks associated with owning real estate. 

5. Gives high dividend yields 

Since a REIT must pay at least 90 percent of its taxable income to shareholders to keep its tax-free benefit, REITs tend to have above-average dividend yields. REITs can potentially provide a safe dividend yield of 5 percent or more, while the average stock on the S&P 500 only yields less than 2 percent.  

REITs are an excellent choice for added income. Investors also have the option to reinvest their dividends and buy more shares, compounding gains over time. 

6. Total return potential 

A REIT has high potential for capital appreciation as the value of its underlying assets grows. Since real estate values tend to increase over time, a REIT can use several strategies to create additional value. 

A REIT can develop properties from the ground up or sell valuable properties and redeploy the capital. This, combined with dividends, means a REIT can be an excellent total return investment. 

Want to know which REITs your clients should buy in 2025? Watch this: 

We also have the top 10 REITs to invest in for growth and income! 

What is the average return on a REIT in Canada? 

The average annual return on Canadian REITs usually ranges from eight percent to 10 percent, depending on market conditions and the type of real estate they invest in. Returns include both income from dividends and changes in the stock price. 

Some REITs focused on strong sectors like industrial or residential real estate may perform better. However, like all investments, returns can vary from year to year and are not guaranteed. 

Do REITs do well in a recession? 

REITs can be affected by a recession, but their performance depends on the type of real estate they hold. For example, residential and grocery-anchored retail REITs often hold up better because people still need homes and essentials. Office and luxury retail REITs might struggle more. 

While REITs can face short-term challenges during a downturn, some offer steady income through dividends, which can help cushion the impact. 

What are the different types of REITs?  

Rookie investors may think that REITs are exclusively concerned with homes and rental properties, but it is more diverse than that. For starters, REITs are generally classified by how they generate income from real estate: 

• equity REITs – REITs that acquire, manage, build, sell and renovate income-producing real estate 

• mortgage REITs – REITs that invest in mortgages, mortgage-backed securities (MBS), and related assets, earning income from the interest on their real estate investments 

• hybrid REITs – a combination of equity and mortgage REITs  

Here are other common types of REITs that your clients should check out:  

Residential REITs  

These REITs own and operate some of the most common real estate, namely multi-family rental apartment buildings and manufactured housing. While it may seem attractive, investors should take account of a few factors influencing this REIT’s viability.  

For starters, the best apartment markets tend to be where home affordability is low relative to the rest of the country. If the apartment supply in a particular market remains low and demand rises, residential REITs should earn well. As with all companies, those with the strongest balance sheets and the most available capital normally do the best.   

Multi-residential family REITs are considered a stable, profitable investment option. Find out why in this article. 

Healthcare REITs 

The success of this sort of real estate depends mainly on the healthcare system. Most of the operators of these facilities rely on occupancy fees, healthcare reimbursements, and private payments. Healthcare REITs don't invest in the facilities themselves, but in the real estate of hospitals, medical centres, nursing facilities, and retirement homes.   

When investing in a healthcare REIT, make sure its customers and investments are diversified.  

A healthcare REIT focused on one specific type of facility is good to an extent but so is spreading risk. Generally, an increase in the demand for healthcare services (as in an aging population) is good for healthcare real estate, and therefore profitable for healthcare REITs.  

Office REITs 

Office REITs invest in office buildings and receive rental income from tenants who take on long-term leases. This type of REIT can be a good investment but can be quite risky as it depends on the economy and employment rate. The lower the employment, the fewer the offices, the less income for this REIT.  

Office REITs can provide diversification for REIT investments, but it’s best to invest in those that have interests in economic strongholds like Toronto or Vancouver.  

Retail REITs 

This type of REIT deals in supermarkets, grocery stores, pharmacies, shopping centres, and malls. With the rise of online shopping and the recent pandemic, this REIT took a hit. However, pharmacies and groceries are still a necessity, so this can still be a viable part of a diversified portfolio.  

Industry REITs 

These REITs own and manage industrial facilities and rent out space to industrial tenants. Some industrial REITs focus on specific types of properties, such as warehouses, data centres, and distribution centres. Since 2018, demand for warehouses and data centres has spiked, driving more growth for industrial REIT revenues.  

Thanks in part to the pandemic, these properties will remain crucial for online stores, data management, logistics, and other e-commerce needs. In our 2023 interview with two asset managers, they said that industry REITs are well positioned in Canada. 

What are private REITs? 

There are real estate funds or companies that are not registered with the SEC. As this REIT is “private,” their shares are not traded on national stock exchanges. Typically, private REITs are sold only to institutional investors.  

Speaking of private REITs, American investment guru Dave Ramsey had this to say of this sort of REIT: “They run the spectrum of really, really bad to awesome.” Private REITs are not advisable for beginners in investing, according to Ramsey. 

Watch his video to learn more about why private REITs may not be for your clients, unless they’re the type who have money to burn: 

Here are some guidelines on how advisors can establish if a private REIT is actively managed. 

What are the risks of investing in REITs?  

No investment is without risk or drawbacks. Here are some of the risks:  

Dividends can be taxed 

While REITs don’t have to pay a corporate tax, REIT dividends are normally taxed at a higher rate than other investments. In many cases, dividends are taxed at the same rate as long-term capital gains, which is generally lower than the tax rate of their regular income.  

Dividends paid from REITs don’t always qualify for the capital gains rate. It’s more common for REIT dividends to be taxed at the same rate as ordinary income. 

REITs are sensitive to interest rates 

REITs can be hypersensitive to changes in interest rates. Rising interest rates can hurt the price of REIT shares. In general, the value of REITs is inversely tied to the Treasury yield. This means when the Treasury yield rises, the value of REITs is likely to decline. 

REITs’ value is influenced by trends 

Unlike other investments, REITs can be very much affected by risks associated with the property. For instance, if a person invests in a REIT that’s a portfolio of candy stores in strip malls, they could see their investment take a hit if candy or strip malls fall out of favour. 

Read and bookmark our Investor Resources page for more guidance and information on investment, wealth, and other financial planning topics.