For the average (non-multi-millionaire) investor, the idea of investing in real estate may seem risky at best, ill-advised at worst. Headlines about the real estate bust don’t counteract that impression and everyone’s heard about the friend or relative who bought a duplex thinking it would mean an easy income stream only to find themselves thrust into the role of an embattled landlord with wayward tenants and a property that always seems to need maintenance.
Contrary to those impressions, real estate investment vehicles offer investors the three things that matter most: wealth preservation, wealth growth and income generation and there are a couple of ways that a smaller investor can get in on the real estate market without the usual headaches and with as reasonable a surety as there ever is of making steady returns.
They are known by their acronyms:
In short, both involve a form of shared ownership of income producing properties like shopping malls, apartment complexes and other building developments but there are some important differences between the two.
A syndicated mortgage takes the pooled funds of two or more investors to purchase a property. In that sense it acts like mutual funds in the equity market in that you can access ownership of properties that would be beyond your individual means.
Building contractors are always searching for new ways of generating capital for larger projects and often look to a syndicated mortgage for what is known as ‘mezzanine financing’ which fills the gap between equity and the primary mortgage. It’s a way for a developer to raise close to 100% financing for a project and they’re becoming more and more popular as such.
Your income as an SMI investor will usually come from interest payments that derive from the project’s revenues and these are paid out typically on a fixed schedule and over a fixed term. Unlike a direct equity investor or mortgage holder, your returns aren’t based on the value of the property and so they are not immediately subject to ups and downs in the real estate market; that may come down the line however as property value affects costs and revenues.
What to Look For:
The REIT is another form of pooled investment in the real estate market and they are sold just like stocks on the major stock exchanges. REITs developed in the United States as an act of Congress in the 1960’s but due to legislative differences and subsequent changes, only began to take hold in Canada in the last couple of decades. The first Canadian REIT went on the market at the TSE in 1993.
As an entity, a REIT involves direct investment in real estate projects in various ways including outright ownership or via mortgage investment.
There are three types of REITs
Federal legislation mandates the specific mix of income and investments that a REIT can include.
Investors can purchase shares in a REIT directly on an open exchange. A REIT will use the funds available to invest in buildings such as shopping malls, apartment buildings, hotels or office buildings and they may specialize in a particular type of building or in a specific region or country. A REIT is a liquid investment that typically pays dividends.
As with any type of investment, your best bet is to get good advice from a financial advisor who specializes in this field.
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