REIT – Real Estate Investment Trusts

I’ve discussed at length the difficulties that small landlords face. The bottom line is that they are usually competing with residential consumers for rental properties. Homeowners will pay more for houses than landlords. Landlords can’t pay high prices if they want to own a sustainable property that doesn’t require substantial cash “donations” from the owner.

Unfortunately, prices on investment properties start to be anchored to their income generating capacity at the $1 million mark. (In Toronto) this is far beyond the ability of the average landlord to fund. You’ll need roughly $400,000 to buy an apartment building at this price point. What if you don’t know anything about managing property?

I recently went to CAIC, an event for owners, investors, property managers and other professionals who operate buildings. There were a number of very well informed, knowledgeable and relevant speeches about many different issues that challenge the industry.The first panel I got to discussed REITs and how they work. It was fascinating to get an inside look at the industry.

REITs get money from investors and buy buildings. Using the income from those buildings they pay their investors distributions. (Interest) There’s a lot more to it. You have to know how to manage a building so it makes money. I’ve seen some of the problems related to owner operated buildings and what happens when they don’t have any idea how to professionally manage their buildings. Real Estate is not an easy business.

Publicly traded REITs get their money from investors on the stock market. They issue shares and use the money raised to go buy more buildings. I discussed this kind of REIT and why I think there’s a serious risk with these companies. Basically, because they are on the stock market, investors can sell their shares at any time. This worries me, specifically because it is my belief that in Canada we are looking a serious readjustment in the residential real estate market. A lot of what follows is depending on if the general public starts to panic or not. Because if John Q Public starts to panic any investment with Real Estate in the name is going to take a hit. Let’s face it, John isn’t that bright and he’ll sell his shares because the “Real Estate Market Is Tanking”. So what happens if prices just go down and nobody panics? Nothing, unless the entire stock market drops precipitously for some other reason. In this case, the price of the units is dependent on what someone want to pay for them on the stock market rather than what the buildings are worth.

The price of the units of a private REIT is determined by the value of the building. There are some very standard calculations used to say how much a building is worth and these are used to determine the value of the building. For example if your building is worth $1,000,000 and you have 100,000 units, your units are worth $10. It’s not really that simple because there will be more than one building in the portfolio and the chances of a nice round number are slim, however that’s the basics.

If you want to avoid stock market risk by buying into a Private REIT, you have to be an accredited investor. This means either investing over $150,000 or having net worth over $400,000, or income over $200,000 (singly) or $300,000 (jointly). If you are an accredited investor qualified by income or income the minimum investment is $5000. These criteria apply to Ontario, the other provincial requirements are lower.

The other catch is, because a REIT uses your money to buy a building, you have to wait to get your money out. Read the fine print on the Offering Memorandum for more details.

Publicly Traded REITs are easier to buy than private REITs. You just go into your trading account or call your broker and buy them on the open market. Just like any other stock you have trading risks involved.

The private REIT is harder to buy, it will take more time and investigation. However for those investors who don’t want to have anything to do with the stock market but want higher returns than 2% from their savings account, a private REIT is a great alternative. Usually Private REITs pay about 1 to 3% more in distributions.

I wrote up my coverage of CAIC for Million Dollar Journey. After I did, I emailed all the speakers just to verify that all my facts were 100% accurate. Greg Romundt of Centurion Apartment REIT was the only exec who replied directly. I did get another reply which I will post here later. I also emailed him six questions I had following the event with the goal of explaining REITs better for investors. My email interview with Mr. Greg Romundt will be appearing next Wednesday and Friday in two parts. Furthermore he is willing to respond to any questions about REITs that readers may have.

I’m impressed first of all for his willingness to answer my questions and the depth and breadth with which he did so. Another thing he mentioned was that if you are making a substantial investment in a private REIT, you should ask if it is possible to meet the people who are going to be managing your money and subsequent investment. This type of transparency is extremely valuable. I’d go even further if I were investing a large sum and suggest going to visit any properties in your area before you invest any money in any REIT (Publicly traded or Private) this way you can judge if you want to be involved in the company.

I’ve been concerned about REITs. I wrote about the concerns I had in REITs and the Real Estate Market. Private REITs address the concerns I addressed in that article because they are not publicly traded and based on the value of the buildings. The other factor is a more personal observation about Greg Romundt in particular. He’s accessible, willing to talk and explain and seems like an honest guy. Those are all very important for the investor because it suggests a commitment to transparency, sustainability and ethical business practices. Furthermore, if he has the decency to answer a relatively unknown blogger’s questions, he’ll answer investor questions too.

For those who want to invest in Real Estate, but avoid the stock market, and who believe that Appreciation = Speculation in real estate a private REIT may just be what you’re looking for.