The Motley Fool

Rental Property or REIT: Which Is the Better Choice in 2020?

Image source: Getty Images

There are fewer topics that kick off more heated debates than investing in real estate in Canada. You might have hours of discussions on rental yields, mortgage rates, and downsizing retirement plans made by someone you know. Owning real estate properties as an investment has long been seen as an ideal goal.

Investing in real estate, however, requires a significant capital upfront. Once you invest, it takes a substantial period before your real estate asset can turn a profit for you. The current housing market is inflated in major Canadian cities, and many Canadians do not have the kind of capital to purchase properties.

The fact remains that real estate can be quite profitable for you. What if I told you there is a way to leverage the real estate sector without having actually to purchase a physical property? The answer is real estate investment trusts (REITs).

Real estate investment trusts

REITs are an asset class that helps you get exposure to the real estate industry, offering investors the opportunity to capitalize on the benefits of dividend stocks. REITs combine the best of both the stock market and real estate industries.

REITs are trusts that own and manage portfolios of income-generating real estate. Most of the profits generated by REITs are paid out to shareholders in the form of dividends. REITs trade on the stock market like typical stocks, making them ideal for passive income seekers.

It allows them to enjoy the benefits of income-generating properties without worrying about substantial upfront costs or expenses for reparations or mortgages.

A dreamy REIT

One of the best-performing REITs throughout 2019 was Dream Industrial REIT (TSX:DIR.UN). It gained almost 40% in 2019, outperforming the S&P/TSX Composite Index, which grew by a mere 19% in the same period. Dream Industrial enjoyed reliable results, delivering attractive returns for shareholders in 2019.

The stock finished fiscal 2019, with an occupancy rate of an impressive 95.8%. The REIT is reorganizing its portfolio of properties to unlock further value for investors.

Its net income rose by 22% year-over-year by the end of 2019 to $139 million. Its funds from operations (FFO) rose by almost 20% to $105 million, and its net income increased by 14% to reach $179 million in the same period.

The REIT has seen robust growth by selling its non-core properties, increasing focus on developing its primary assets, getting higher rental rates, and growing demand for industrial real estate.

Dream Industrial owns and operates a portfolio of 209 industrial properties in Canada and the U.S.

Its portfolio consists of high-quality and income-generating assets that are geographically diverse and offer extraordinary value. It can attract a substantial number of tenants from a wide tenant base.

Foolish takeaway

REITs offer huge economic moats, stable and reliable income, high payout yields, and resistance to economic downturns. REITs operating in the industrial sector also offer insulation from any housing market crash.

At the time of writing, Dream REIT is trading for $13.75 per share on the TSX, offering a phenomenal dividend yield of 5.09%. I think investing in Dream Industrial could be a much better way to expend your capital and watch your wealth grow compared to investing in a real estate property.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends DREAM INDUSTRIAL REIT.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.