5 Reasons to Never Buy Investment Real Estate

Don’t buy rental properties. Buy H&R Real Estate Investment Trust (TSX:HR.UN), Dream Office REIT (TSX:D.UN), and RioCan Real Estate Investment Trust (TSX:REI) instead.

| More on:
The Motley Fool

Owning rental properties is a wonderful business…

These nice companies called banks lend you all the money you need to invest. Then friendly people called tenants pay off your mortgage. In 20 years or less, you own the property free and clear, but you continue to receive the steady rental income.

No wonder thousands of Canadians want to try their hands in the real estate business every year. But while owning rental properties sounds good in theory, everyone has heard the landlord horror stories. However, there’s a far easier (and more profitable) way to invest in rental properties: real estate investment trusts.

REITs are like real estate mutual funds, buying and selling investment properties on behalf of their unitholders. And for most investors, they are a far better alternative to buying real estate. Here are five reasons to skip rental properties altogether and buy REITs instead.

1. No diversification 

Imagine, you’re a residential landlord and you lose your only tenant. All of a sudden, you’re missing out on 100% of your rental income. Now that’s a problem!

Now consider a well-diversified firm like H&R Real Estate Investment Trust (TSX: HR.UN). The fund’s business empire includes hundreds of residential, commercial, and industrial properties across the continent. There’re no worries if one industry should fall on hard times or if a tenant decides to vacate. It only represents a small fraction of the total portfolio.

2. Too much hassle

Rental properties are a great source of income. That is, if you don’t mind spending your retirement unclogging toilets, fixing leaky faucets, and chasing down rent cheques. How many of us dream of spending cold February mornings shovelling driveways?

Becoming a landlord isn’t for everyone. However, when you own a REIT, a professional management team handles all of the day-to-day issues. You just have to sit back and cash the distribution cheques.

3. No liquidity 

REITs can be bought and sold with the click of a mouse, just like common stocks. In every transaction, you pay a small brokerage commission plus an exchange fee. This will cost between $5 and $30 at most discount brokers.

Rental properties can take months to sell. That’s a problem if you need to raise cash quickly. Other expenses — including realtor commissions, title insurance, legal fees, and transfer taxes — can cost you tens of thousands of dollars.

4. Leverage

It’s a common misconception, but rental properties aren’t the only place where you can exploit leverage. For example, RioCan Real Estate Investment Trust (TSX: REI.UN) borrows 44¢ in debt for every $1 it buys in assets. RioCan investors are using debt to juice returns just like traditional landlords.

That said, leverage is a two-way street. While debt enhances returns, it also increases risk. Leverage is no magic bullet in building wealth.

5. Time consuming

It can take months to find a rental property, close the deal, and find a tenant. You will need at least a $25,000 down payment just to get into the business. Even in the best-case scenario, it can take months to start generating income.

However, consider Dream Office REIT (TSX: D.UN). You can get started today by buying a single unit for under $30. Right now, the trust pays out a monthly distribution of 18.66¢ per unit, which comes out to an annualized yield of 7.8%. And if you become a partner by September 26, you’ll be eligible to collect your first distribution cheque on October 18.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robert Baillieul has no position in any stocks mentioned.

More on Investing

Oil pumps against sunset
Energy Stocks

Is it a Good Time to Buy in the Energy Sector?

Boosted by a very bullish supply/demand environment, energy stocks like Canadian Natural Resources and Tourmaline have much further to go.

Read more »


2 Stocks to Buy Offering Better Value Than Air Canada

Air Canada has been a popular stock for years, but despite its low price, these two picks are much better…

Read more »

money cash dividends

How to Make $373/Month in Passive Income With These 2 TSX Stocks

You could bring in passive income of $4,482 annually, or $373 per month!

Read more »

clock time
Stocks for Beginners

3 Stocks to Start Investing Today

Looking for a set of stocks to start investing today? Here are some great options that offer growth and income…

Read more »

investment research
Dividend Stocks

Young Investors: Create Cash Flow With This Top Dividend Stock

If you're a young investor looking for cash flow, you need a strong dividend stock and solid banking program designed…

Read more »

Illustration of bull and bear

Is the Stock Market Selloff Over?

Throughout this week, many stocks have been gaining value and rebounding from their lows. So, is the stock market selloff…

Read more »

potted green plant grows up in arrow shape

Retirement 101: How Investors Can Turn $20,000 Into $500,000 in 25 Years

These top TSX dividend stocks have made some investors rich.

Read more »

Hand writing Time for Action concept with red marker on transparent wipe board.
Dividend Stocks

3 Superb Dividend Stocks I’m Ready to Buy

The market is full of great options for income-seeking investors. Here are three superb dividend stocks to buy now.

Read more »