# REITs?



## jamesbe (May 8, 2010)

Not sure if this should be in the real estate or investment section (please move if it is the wrong spot).

I have some $$$, I was thinking of buying another rental property as renting mine out was so darn easy and the last 2.5 years have been a breeze. My rental unit has increased in value from $140k - $180k in 2.5 years (based on comparable sales over the past 6 months).

So it was a great investment. My mortgage broker said I should take the equity and move it to another property and get another one, I contemplated it, but now at $180k the numbers are not as favourable and I do not see these units increasing in value like they have in the previous years. 

To give you an idea these units sold for $96k in 1990, in 2009 I bought it for $140 and now they are "worth" $180. They have pretty much topped out and I have seen many units sold at $180k since last year, so they went up to $180 in about a year and then stayed there for the next year.

So LONG story ... sorry.

I'm thinking of taking some money and expanding my portfolio into REITs. I don't know much about them except RioCan. What are other people doing? Are you happy with the dividends? What are your thoughts on risk factors of various different types of REITs?

Can someone school me? I'm thinking an initial investment of $10k in my TFSA it's not much but it's a start.


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## andrewf (Mar 1, 2010)

Why does it have to be real estate? I love REITs, but some diversification wouldn't hurt. REITs have done very well after the crash, but I think returns from here forward are likely to be moderate at best.


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## jamesbe (May 8, 2010)

Because I have everything else in my RRSP.  I have no real estate elsewhere.

But from what you say (and seeing riocan is at a 52 week high) perhaps what has happened to my condo is the same all around in real estate right now. It's at the TOP and I should wait?

Although dividends would pay out, what 5% ish?


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## andrewf (Mar 1, 2010)

If it's a non-registered account, you might care about the book-keeping on ACB. REITs often distribute return of capital, which you have to track as part of the ACB. 

If it's part of a diversified portfolio, I think REITs are likely a much better investment than a rental condo. They are far more liquid if the market goes pear-shaped.


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## Cal (Jun 17, 2009)

Do a quick search there is at least 1 other good thread on REITS, I am sure some of the info there will prove to be helpful.


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## sprocket1200 (Aug 21, 2009)

can you tell us what your expenses were for those 2.5 yrs. without including that info, there is no way to tell if the investment was good or not...

plus if you sell it at 180 and take our realtor commissions your gain will be even less on top of your annual/monthly expenses...

would you actually make any money at all???


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## jamesbe (May 8, 2010)

LOL I love the skeptics. Expenses were $0 after income, I made about $700 actually.

Realtor fees well at 5% would be only $9k but I know a lot of realtors that will do it for much less, so probably $5k. That's in 2.5 years -- I'll hold longer and make more.


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## CanadianCapitalist (Mar 31, 2009)

Sorry I don't quite understand what you mean by "taking your money" and investing in REITs. Do you mean you are going to pull out some equity and purchase REITs? Or are you going to sell your rental and purchase REITs? 

There is a world of difference between the first and second. The first means you still have massive exposure to real estate. Why would you want to add to add even more? The second means you can choose to opt some REITs for diversification purposes.


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## Cal (Jun 17, 2009)

Jamesbe...not sure on your wording...but you made $700 per month profit after expenses? Am I understanding that correctly....that is pretty good.


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## jamesbe (May 8, 2010)

Cal, no I made $700 per year 

CC -- I've got a lot of cash in the bank I'm thinking of investing in either another property or REIT. Sorry for the confusion after re-reading I see where you got that.


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## sprocket1200 (Aug 21, 2009)

cal, but he won't tell you his expenses. all smoke and mirrors...


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## jamesbe (May 8, 2010)

Wow really? 

I have to give you my entire balance sheet?

Rent 1045 a month
Mortgage and taxes and insurance and condo fees $900 a month
Had to replace the stove, $315

I guess it sucks to be you as I have now rented it out for $1200 a month and my expenses didn't change.

Smoke and mirrors as my bank account increases monthly while yours does not, what is with this forum lately? As soon as someone claims a profit everyone thinks they are hiding something. Unlike 99% of the population I didn't fail math or accounting, and I wouldn't keep property if I was losing monthly.


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## Cal (Jun 17, 2009)

For $700 a year, this is how I would look at it:

I am not sure what your out of pocket down payment was on the property, but without any expenses, hassles, contracts or anything $15,000 invested in RioCan, REI.UN would yield you approximately just under $90 a month. Obviously depending upon the initial purchase price and number of units you were able to obtain. That is almost $1100 a year.

And it is taxed less than $700 profit made in RE profits.

And I know some could argue that the value of the RE asset has risen in the past 2.5 years about 25%, however so has the value of the REI.UN shares.

So if you paid outright 140K for the property, you would have gotten a really crappy return.

But if you put down, less than 10K, it seem it would have been a fair return.

Depending upon how much equity you have in your property, you may want to consider selling, and investing, rather than keeping the intial property and either buying another or investing in a REIT.


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## HaroldCrump (Jun 10, 2009)

Cal said:


> So if you paid outright 140K for the property, you would have gotten a really crappy return.
> 
> But if you put down, less than 10K, it seem it would have been a fair return.


Furthermore, the exact same leverage is available for REITs.
The only caveat is that it exposes an investor to margin calls, unlike a mortgage against a property.
However, in the event of a RE "correction" the opposite it true (i.e. lender may not renew the mortgage if loan > property value).


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## CanadianCapitalist (Mar 31, 2009)

jamesbe said:


> CC -- I've got a lot of cash in the bank I'm thinking of investing in either another property or REIT. Sorry for the confusion after re-reading I see where you got that.


Okay, I understand your post better now. Thanks for the explanation. I guess the first thing you need to figure out is what percentage of your assets you want to hold in real estate. Assuming you have a home and another rental property worth $180K, it's likely that you already have a rather large allocation to real estate. Are you comfortable with such a high allocation? Are you really sure you want to increase your exposure to real estate either via REITs or rental properties?

I see that you are from Ottawa as well. As you know, the real estate outlook for the city is not that great with the biggest employer, the Federal Government, has started retrenching after expanding a lot in the recent past. 

Assuming your answer is still yes, my personal preference is for REITs. The reasons: (1) No extra work involved compared to owning rental properties. (2) Liquidity -- you can sell pretty much any time you want. (3) Diversification -- each REIT owns hundreds of properties across all geographies and you can diversify further by owning a bunch of REITs directly or through a fund. You can also diversify internationally. (4) You can calibrate your exposure precisely. If you want 10% of your portfolio in REITs, you can do so.


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## marina628 (Dec 14, 2010)

OP made 40k on equity plus whatever the tenant paid off on the mortgage plus still pocketed $700 after expenses after 2.5 years .Let's assume he put down $28,000 (20%) that is not a bad return.

I will give you my own example I paid $169,000 for a house in Oshawa in December 2009 that was 4 years old power of sale .In less than 2 years that house has increase $41,000 PLUS $12300 paid down on the mortgage by the tenants .I had a positive cash flow of $4813 in 2010.I invested 5% down and did a 5% cash back mortgage at 5.49% .My total investment in this house was about $2400 in legal costs.
Example #2 I bought a detached house three years old for $234,000 ,again another power of sale in March 2010 .I put down 20% cash and paid about $11,000for legal ,land transfer ,New A/C ,Fridge and stove and New carpet in some bedrooms.Total investment $57800.We are renting this house for $1600+ and recently a house in not as good condition as this one sold for $280,000.This house we got a 3.49% 5 year mortgage and borrowed $179,000 ,our 20 year mortgage payment is $1034.90 +283 a month in taxes.Our water bill and insurance about $100 a month which leaves us about $178 a month profit.The balance on mortgage today is $168,500.So in 18 months i have made $46,000 on my investment.
Real estate investing is not for everyone but we have bought well ,always houses under 5 years old ,detached(not linked!) with decent lots and in good areas.We also only have single family homes , no basement apartments or multi unit places for me.I am ok if my properties stay at today's prices for next 15 years because somebody else will pay them off for me.


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## jamesbe (May 8, 2010)

I'm thinking of doing this in my TFSA so setting up a drip with REI.UN right now would most likely net me a good return. Thanks, I think I u derstand more now.

I'm really likeing drips in my TFSA since it is tax free.


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## Sherlock (Apr 18, 2010)

I have REI.UN in my TFSA now, how do I set it up so that instead of the dividends being deposited as cash into my TFSA each month, I just get more shares?


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## Dmoney (Apr 28, 2011)

jamesbe said:


> As soon as someone claims a profit everyone thinks they are hiding something.


It certainly does seem this way. Obviously money can be made in real estate, but it can be challenging, and isn't always smooth sailing. 

I would say an individual investor CAN make way more on select real estate than by investing in a REIT, but for the average investor it is probably much easier and less effort just to buy a REIT or REIT ETF.

An apples to apples comparison is nearly impossible without factoring in the value of your time, the risk/leverage employed, return on equity invested, cash flows and on and on and on. 

I know a lot of people make claims that seem too good to be true, but even if they aren't true, why let it bother you?


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## marina628 (Dec 14, 2010)

I agree DMoney it is not for everyone and usually the ones who fail usually do not have much cash behind them once they pay the down payment and closing fees.Also people who have no skills in being a handyman are at disadvantage compared to people like my husband who has been in trades almost 30 years .
You also need to have certain type of personality to be a good landlord.


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## Cal (Jun 17, 2009)

Sherlock said:


> I have REI.UN in my TFSA now, how do I set it up so that instead of the dividends being deposited as cash into my TFSA each month, I just get more shares?


Call the broker and tell them you want the dividends to be reinvested. Then you will get a 3.1% discount on your reinvested dividends as well. (in the case of REI.UN)


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## andrewf (Mar 1, 2010)

^ That's a little simplistic. If you call your broker and ask for that, you're likely to get a synthetic DRIP, which would give no discount. If you got your shares certified so that you could drip, you'll pay a large service fee for the privilege.


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## sprocket1200 (Aug 21, 2009)

bought rei.un at $12.50 just over two years ago. not sure if that is a good return as clearly I don't know about making a profit...


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## CanadianCapitalist (Mar 31, 2009)

andrewf said:


> If you call your broker and ask for that, you're likely to get a synthetic DRIP, which would give no discount.


I looked into this topic when the banks offered a discount on their DRIPs. I called a couple of brokers and asked them if the synthetic DRIPPers also receive the same discount. The answer was yes.


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## andrewf (Mar 1, 2010)

I read elsewhere that the discount does not apply. I guess the answer is to ask your broker.

In that case, why would people go to the considerable expense of certifying shares?


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## Potato (Apr 3, 2009)

Andrew, I think part of the reason may be that a DRIP with certifying shares etc. allows one to get fractional shares, whereas a synthetic DRIP will give a mix of shares and cash. Also, there are many companies with SPPs, and those require the rigamarole.


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## Sampson (Apr 3, 2009)

My experience has been that discounts are often, but not always applied. This is also true for DRIP or even synthetic DRIP eligibility.

The worst thing is that my discount broker does not publish this list, so you have t ask a rep specifically about each holding.


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## Sampson (Apr 3, 2009)

andrewf said:


> why would people go to the considerable expense of certifying shares?


The fractional shares + the ability to buy shares in the future _sans_ commission. The latter is a huge bonus if it is something you intend buying/holding over a generation.

$50 and some paperwork to register, then free trading for life. If more Canadian ETF operators ever get this going...


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## Banalanal (Mar 28, 2011)

Going to link this to get more analyses.

http://canadianmoneyforum.com/showthread.php?p=80588&posted=1#post80588


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## Berubeland (Sep 6, 2009)

For those of you who are bad at math. I will explain this. 

Real Estate, especially real estate is more like a grocery store as far as margins are concerned than anything else. 

The amount of money you make is the difference between your mortgage rate and your cap rate. 

Now if you look at the cap rates of these buildings that REIT's are buying the spread is 1%, 2% and so on. 

They also make the full 5% or so on the 30% downpayment. 

It is not sustainable for any REIT to pay out 20%. 

So if you buy a $1,000,000 building your downpayment of 30% would make you $15,000 and the rest of the building would make you $7000 *annually.* This is with a 4% mortgage and 5% cap rate. 

Who wants some BRE-X? Selling your shares to fools will make you millions. 

Anyways when the money free for all ends you'll remember this post.

What do I know anyways? I'm currently managing a portfolio of three money losing bleeding cash cow buildings back from the brink of insolvency. 

Oh and I don't understand how people can simultaneously say I'm not buying rental properties because there's no profit in it and then go buy REIT's. Give your head a shake.


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## Dmoney (Apr 28, 2011)

The linked post is referring to a mortgage REIT, not a property REIT. Holds a bunch of mortgage backed securities, borrows short, lends long. 

Is a pure bet on ST interest rates remaining low.


As for actual REITs, they are getting mortgages at absurdly low rates, which is why they can make money. 5-year CMHC backed mortgages for multi-unit res properties are 2.6%, 10-year is 3.5% (would have to double check numbers to be 110% sure, but it is well under 3% for the 5 year and 4% for the 10 year). 

If you buy a building at a cap rate of 5-7% which the res REITs largely do, you can lock in 10-year financing which gives you a 1.5% to 3.5% margin, plus the 5-7% on the down-payment or equity portion. 10 years of rent escalations will be where they really make their money. If NOI can increase in line with rent steps, the REIT will make a killing.

A 5% + yield is entirely sustainable, but is obviously never guaranteed. A 20% yield would dictate one of two things: either the company is a complete piece of garbage YLO style, or the equity markets are just out of step with reality (2008 meltdown saw a lot of quality names yielding in the double digits, even last monday, a couple very stable reits were approaching double digits and a couple hit that mark). Keep in mind though that REITs can get the cheapest financing because they have billions in property as collateral and banks salivate at the opportunity to lend to the more stable ones.


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## HaroldCrump (Jun 10, 2009)

None of the REITs (at least in the Canadian market) are paying anything close to 20%.
Even Scott's is yielding just around 10% and they are in deep do-do.
Most of the stable REITs are paying 5% - 7% at best.
XRE yield is around 6% I believe.


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## jamesbe (May 8, 2010)

Why do you think Scott's is in deep do-do?


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## HaroldCrump (Jun 10, 2009)

jamesbe said:


> Why do you think Scott's is in deep do-do?


I don't know the details - I'm not a shareholder and neither have analyzed the company, but the Priszm (KFC/Pizza Hut) debacle was their latest misery.
Unit price has been essentially flat for last 2 years, so all you are getting is the 10%+ distribution.


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## jamesbe (May 8, 2010)

Yeah but 10% is great if they stay afloat  Not so great if the stock tumbles and they go belly up though.


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## Dmoney (Apr 28, 2011)

jamesbe said:


> Why do you think Scott's is in deep do-do?


Big issue is obviously the Priszm income fund, which turns into an even bigger issue because it makes lenders wary of default. So on the one hand they have lost their biggest tenant, so income is in danger, and on the other hand they are paying way more for financing than they would be if they were a stable, less risky company.

I'd heard there were issues with the CFO as well, who has now been replaced, but I don't know details.

As for the low Canadian REIT yields, they are way higher than their counterparts in the US, and there are a few credible REITs yielding 7-8%, and 9-10% on a sizeable dip.


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## Cal (Jun 17, 2009)

Anything yielding that high is a warning sign to me....


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## Financial Cents (Jul 22, 2010)

Sampson said:


> The fractional shares + the ability to buy shares in the future _sans_ commission. The latter is a huge bonus if it is something you intend buying/holding over a generation.


Absolutely correct Sampson.

A discount on DRIPs applies to both the synthetic DRIP (brokerage) and the full DRIP (transfer agents).


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## larry81 (Nov 22, 2010)

Financial Cents said:


> Absolutely correct Sampson.
> 
> A discount on DRIPs applies to both the synthetic DRIP (brokerage) and the full DRIP (transfer agents).


Correct me if i am wrong but holding REIT directly and having a ~3% DRIP rebate is a big plus when compared to owning REIT through ETF like XRE/ZRE ?

Or does dripping XRE/ZRE also enable you to benefit from this 'rebate' ?


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## Dmoney (Apr 28, 2011)

Cal said:


> Anything yielding that high is a warning sign to me....


It depends, if you thought that way at the end of '08 you missed a huge buying opportunity (as did I). I know some of the income trusts/REITs were yielding in the 20% range, and the majority maintained their distributions. I know the income trusts were a little different in that there was an anticipated cut to their distributions once they became taxable, which was factored in, but even if you looked at yield on 2008 price for 2011 dividends, you have a large number that were returning 15-20% in distributions alone.

Of course you also had bank stocks yielding 8% so I would say that it a one-time anomaly. 

In a regular market, a 10% yield is a warning sign, in an irrational market, it could either be a suicide pick or a three-bagger.


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## Cal (Jun 17, 2009)

Yes, I was assuming the current market, for a 20% return to be a warning sign.

But you make a good point, there are circumstances, that can be exceptions to the rule.


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## larry81 (Nov 22, 2010)

Anyone can provide some answer to my previous question


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## Cal (Jun 17, 2009)

Check out www.dripprimer.ca for some of the etf's that also offer a drip.

Yes it is a bonus to get a % discount on your reinvested dividends through a drip program offered by some of the REIT's via their brokerages.

But an etf can offer alot of diveristy to an investor, as opposed to picking a few REIT's.

Personally, I like to hold a couple invididual ones...but that is just me and every investor puts their portfolio together differently to achieve different goals.


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