In the past, we have looked at options that are available to investors who want to make money from the real estate market without necessarily taking the standard approach of owning and managing a property, or for those who are looking to diversify an existing real estate portfolio. There is a wide range of investment options available for Canadians looking to invest in real estate from mortgage-backed securities to REITs, real estate funds, and more.
Some of these options are traded on the open market like stocks, which makes them appealing to investors for their ease of entry and wide range of choices. However, anyone who has spent time in the stock market will tell you the joys and pains of such a volatile asset. One of the most crucial aspects of investing in stocks and other market traded assets is doing the due diligence to pick the correct stocks so that you can get the returns you want.
While no one but yourself or a qualified financial advisor can pick your stock choices for you, we want to help those who are interested in beginning with real estate stocks to make their choices a little easier. In this guide, we will cover everything you need to know to get started in real estate stocks and some of the most popular stocks you may be interested in to get started.
Why invest in real estate stocks?
Investing in stocks and other exchange-traded assets is a very different experience than investing in physical real estate, but it can, nonetheless, be very profitable. Overall, one may choose to invest in real estate stocks for a number of reasons that make these investments different from traditional land ownership.
Real estate exposure without ownership
One of the great things about investing in these sorts of products is the ability to be exposed to real estate without owning any property. While owning property is great, it comes with its own challenges. It can be a lengthy process to find and buy property. It can be a lot of work to manage and make a property profitable, and you are forced to put a lot of money into a single non-liquid asset.
On the other hand, if you were to buy a real estate stock, you avoid all of these issues while still enjoying the benefit of the underlying market to which they are tied. Real estate stocks can be much cheaper to get into, meaning it’s much easier to diversify your portfolio and you can easily sell when you feel it’s time to cash out or rebalance.
This can also be good for those who are wary of other stocks and how they are tied to vague company valuations. With many real estate stock investments, your value is always tied to a real asset.
Many choices for different stock products
Another benefit of this sort of investment is the wide range of variety available on the market. First of all, you have various types of investment products such as stocks, REITs, or ETFs. Within these categories, every offering will have its own unique profile of underlying holdings, management, past returns, risk, dividends, and more. This provides an investor with a lot of choices. You can invest in many different real estate segments broadly such as residential and commercial, or get into more specific areas like apartment investing, grocery stores, or almost anything else. You can even invest in Canadian stocks that have holdings internationally, exposing you to markets beyond our borders that may be harder to buy property in.
Just because you aren’t buying a property directly, doesn’t mean your investment is wasted. Many real estate stock products have shown great growth year over year. The consistent demand and growth in real estate are experienced just as much in stocks as in actual ownership, and when things do go bad, they often don’t crash as fast as other stocks and tend to retain a lot of their value. If things do start to turn around on any particular stock, you always have the option of adjusting your holdings to more favourable performers.
Not without downsides
All this considered, investing in the real estate market through stocks and other exchange-traded assets is not without its downsides. The most obvious is that you don’t actually own any real estate. Despite the benefits of this fact mentioned before, there are many other benefits to owning land that can’t be matched by simply owning stocks.
This also means you do not have direct control over your investment as you would with a property you directly manage. Furthermore, any daily traded market is going to be a lot more volatile than property values. Though you can access the liquidity in stock much easier, there is no guarantee that you won’t need it on an off day and be forced to sell for less than you would like.
Overall, this sort of investment has its benefits and downsides as any investment does. Ultimately, you need to assess your own needs in terms of how much you want to invest, for how long, and at what risk capacity in order to determine how much real estate stocks are right for you. Always consider speaking to an investment advisor for investment advice that is most suited to your own circumstances.
What stock products are available in real estate?
While I have been talking about real estate stocks, your options aren’t technically limited to strictly stocks. Rather, there are a few different investment products that are similar to stocks but are technically distinct things. The common trait between them all is that they are traded on an exchange, meaning they are easily bought and sold on a daily basis and represent some portion of an underlying asset portfolio.
Real estate stocks
First of all, there are basic real estate stocks. A stock is tied to an ownership share of a specific company and entitles the holder to the related share of the profits, dividends, and in the case of common stock, some amount of voting power in the company.
Real estate stocks then are simply stocks for any company that works in the real estate field. This could be a company that is wholly or in part involved in real estate and may offer various goods or services to its customers. These may include real estate developers, property management companies, mortgage companies, and more.
Real Estate Investment Trusts (REITs)
The next product you will probably be familiar with is REITs. REITs are technically stocks in real estate companies, though their shares are considered their own distinct asset class. A REIT is a specific business model that operates by owning and operating (and sometimes financing and developing) income-producing real estate.
What makes a REIT different from other real estate companies is they are created for the express purpose of creating value for investors rather than a general real estate company that, while beholden to shareholders, may have a range of different functions and goals. REITs are also taxed differently than your average company, often being exempt from paying tax and passing tax liability on to their investors.
REITs are probably the most popular real estate stock product as they are specifically geared towards producing money in real estate. They often either hold a diversified portfolio or focus on a specific real estate niche. For example, a residential REIT may focus on many different rental property types while a retail REIT may own only that specific type of commercial property.
There is a wide range of REITS, each with its own characteristics, providing investors with a lot of options as to what sorts of properties they want to invest in. REITs offer investors favourable yearly growth as well as regular dividend payouts.
A final category I would include is REIT ETFs. An Exchange Traded Fund is an investment fund that generally acts to index a larger market or to consolidate many different products into a single fund in which investors can buy and sell shares like regular stocks. The benefit to an ETF is they are diversified by design and often offers reliable, and potentially lower, returns compared to other stock products. ETFs are popular as a simple way to invest without the hassle of picking and choosing individual stocks.
For the luxury, you may see slightly lower returns (the overall assets within the ETF may perform differently, resulting in averaged return across the board) and the fund will take a small management fee out of your returns. A REIT ETF is exactly what it sounds like: a fund that owns shares in various different REITs, allowing investors to get wide exposure and decent returns in one simple product.
Here are some of the most popular and best Canadian REITs on the market now.
Canadian Apartment Properties REIT
Canadian Apartment Properties REIT, also known as CAP REIT (ticker: CAR.UN) is one of the largest REITs in the country, with a market capitalization of almost $9 billion. As the name would suggest, the REIT focuses primarily on rental apartments and townhouses in major urban areas. The trust manages over 60,000 units across the country.
Allied Properties REIT
Allied Properties REIT (ticker AP.UN) is a Canadian office REIT. The trust owns and operates office and retail properties in most major cities in Canada. Though these sectors have experienced some difficulty in the last couple of years, this may provide investors with a deal now that may pay off well later.
Slate Grocery REIT
Slate Grocery REIT (ticker: SGR.UN) is a primarily U.S.-based REIT that focuses on commercial real estate, specifically on retail grocery store properties. This REIT is an example of one that provides investors with access to a very niche real estate segment. However, despite being niche, it is still a strong market. Even as retail has faced difficulty in recent times, things like groceries that represent essential products have tended to do much better overall.
Here are some of the popular Canadian REIT ETFs available on the market now:
iShares S&P/TSX Capped REIT Index ETF
The iShares S&P/TSX Capped REIT Index ETF (XRE.TO) is one of the largest Canadian REIT ETFs and has one of the longest histories. The fund tracks the S&P/TSX Capped REIT index and aims to produce long-term growth.
The ETF’s largest REIT holdings are in retail properties, followed by residential, and then a mix of other REIT holdings. The REIT also has a very affordable price, trading in the $18 range as of writing.
Vanguard FTSE Canadian Capped REIT Index ETF
Vanguard FTSE Canadian Capped REIT Index ETF (ticker VRE.TO) is a REIT ETF offered by Vanguard, one of the largest ETF providers after Blackrock’s iShares. This ETF follows the FTSE Canada All Cap Real Estate Capped 25% index and provides exposure to a range of small, mid, and large-cap real estate companies. The ETF also contains a range of industrial, office, retail, and residential REITs.
BMO Equal Weight REITs Index ETF
The BMO Equal Weight REITs Index ETF (ZRE.TO) is another popular Canadian ETF. This particular ETF follows the Solactive Equal Weight Canada REIT Index. By using an equal weight framework, the fund reduces risk tied to individual securities that may be more or less represented in other funds. The fund provides exposure to large and small real estate companies and invests in a range of property types, primarily retail and residential.
Though REITs and ETFs make up some of the most popular real estate stocks on the market, there are a number of non-REIT real estate companies that you can buy stocks in as well. Here are some of the most popular such stocks:
Colliers International (CIGI) is a Canadian investment management and consultancy company that manages investments around the world. They have a strong investment in a diversified range of real estate properties and businesses and their wide geographical range provides them with great opportunities for growth.
Brookfield Asset Management
Brookfield Asset Management (BAM.A) is a large Canadian alternative investment management company with significant investments in the real estate sector as well as other industries. The company’s long history and experience, as well as its diversified holdings, make it a popular stock pick.
FirstService (FSV) is a real estate services company that has operations in both Canada and the US. The company’s largest service is in property management under which they manage thousands of properties across the continent. Because of the high demand in the residential segment and the popularity of managed investment properties, this company has seen great growth in the past.
How do stocks compare to other passive investment products?
The number one reason that people would choose to invest in real estate stocks over direct ownership is the appeal of passive income. A well-constructed and well-managed stock portfolio will essentially do all the work for you in generating income both in a usable form through dividends, as well as in equity through compounding growth.
However, when it comes to real estate, stocks are not the only passive investment options out there. What are the other options available in passive real estate investing and why should an investor choose stocks?
The first thing I would say is that there is no reason, other than budget constraints, that you should feel the need to pick any one passive investment product. Indeed, a range of different holdings will allow you to get the benefits of all while mitigating the downsides. However, knowing the different pros and cons of each can at least help you to know what may be best to focus on.
One of the most common strategies for passive income would be remote ownership. Essentially, you own a property (usually a rental) and outsource all aspects of the management to a third party. This provides you with the benefit of actual ownership, but without the hassle.
The downsides are that you still need to go through the efforts required to buy a property (potentially made more difficult if buying remotely), you must pay a large cut of your income to a management company, and you don’t have direct control over what happens on your property, which could be a liability.
Real estate funds
Another form of passive investment may be real estate funds. These operate a lot like a REIT would, focusing on buying, selling, developing, and operating real estate in order to generate money for investors. The difference is these funds are often private and not traded on open exchanges. This means they are often smaller, providing you more say over your stake, and potentially netting you greater returns. The downside is that these investments can have a higher minimum cost than stocks and will be harder to sell out of quickly.
Another option for passive investing is crowdfunding. This is a bit like a real estate fund as well but is generally focused on a single project or just a few projects at a time. Investors work together to pool their money towards a property (either development, purchase, or improvement) which can then be sold or operated for income. This can offer huge growth potential and more influence over the project as there are often fewer investors involved than with a larger fund.
However, it may also have a bit more risk as your money is staked on a less diversified project, and your investment can only do as well as the team you have joined is capable of. To succeed in this area, you should do careful due diligence both on the project in question and the team of investors who you will be working with.
Becoming a lender
Finally, you may choose to pursue an option like becoming a lender. As a lender, you will need a significant amount of starting capital that you can then lend out to others for their investment projects. This gives you a lot of control not only in how your money is used, bought by whom, and how they will pay you back.
You can set your own loan terms, interest rates, conditions and more, and you can even receive an equity share of the project if you believe in it deeply. This option also comes with a lot of risks. It will be your responsibility to vet any potential borrowers to ensure they will be able to pay back what they borrow with interest. If you don’t conduct your due diligence and protect yourself legally, you can face a lot of damage. All this work involved also makes it a less passive choice overall.
Overall, the different passive investment options in real estate exist as a sort of give and take. As with most investments, the greater the potential returns, the higher the risk and the potentially the more work required. On the other hand, there are more reliable and more passive investment options, but they may see slower growth. The key is to know how much to invest and where based on your own needs in order to grow your wealth effectively.
It’s easy enough to see real estate stocks as just an alternative to traditional ownership, but this is an oversimplified view. In reality, stocks and other exchange-traded assets are a whole world of their own in investing, with just as much nuance and potential as any other.
While there are a lot of easy options for those just looking to get their toes wet, like ETFs, there is also a whole range of other products for investors who are willing to really get their hands dirty in real estate stocks.
With potential also comes risk so informing yourself is the most important thing you can do to help yourself succeed in investing. Though we have covered a lot of concepts here on a basic level, this should not be seen as at all an exhaustive guide, nor is it financial advice.
Always be sure to do your own personal due diligence and consider consulting with an investment advisor before you make any real estate stock as part of your investment portfolio. That being said, you should hopefully now understand the great potential and exciting opportunities available to you in real estate stocks. We wish you the best of luck in your investment pursuits!