Why go for REITs instead of rental properties?

While the Toronto rental market has continuously exhibited strong performance and value growth, a markets observer argued that investing in the city’s rental properties is less sensible than going for real estate investment trusts.

“Real estate has always been about cash flow. But many properties in Toronto are so expensive they don’t even rent for enough to cover the mortgage payment, never mind other expenses. Landlords care about nothing but price appreciation,” Nelson Smith wrote in a March 22 piece for The Motley Fool Canada.

“This affliction isn’t just seizing Toronto. It’s not a particularly good time to buy real estate in most Canadian cities. A condo or rental house in Vancouver, Calgary, or even Winnipeg doesn’t offer a very attractive cap rate, although some markets are better than others.”

In this regard, REITs are a far superior option, Smith said.

“Investors who buy real estate investment trusts (REITs) get instant diversification, attractive yields, and the satisfaction of knowing they’ll never have to deal with a plumbing emergency,” the analyst explained.

Also, “[most] landlords limit themselves to residential property because they know the market. It’s also more expensive to venture into commercial space,” Smith added.

An example of a reliable choice is Smart REIT (TSX:SRU.UN), which is currently the top landlord for Wal-Mart Canada. “Smart shares pay out a 5.2% distribution and has raised its payout each of the last three years.”

“Approximately 30% of the company’s revenue comes from the world’s largest retailer,” Smith wrote. “Having so many Wal-Marts is a big plus. Wal-Mart attracts plenty of foot traffic, which helps other retailers — even those that compete directly. This has helped keep Smart’s occupancy above 98%, which is one of the best in the business.”


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