Being a landlord can be a real pain in the neck. It seems like an easy way to generate a safe and reliable cash flow stream to bolster your passive income. But in reality, being a landlord is its own job. It’s not at all easy, especially if you’re inexperienced. Amid the COVID-19 crisis, many landlords found out that being a landlord isn’t all it’s shaped to be —chasing tenants for the month’s rent, dealing with deferrals, evictions, disruption to cash flows, and all the sort.
Fortunately, there’s a better way to invest in real estate: REITs. As a shareholder in a REIT, you’ll own a stake in various forms of real estate and will see rents go right into your pocket in the form of a distribution. You’ll delegate the tough tasks to pros who know how to deal with issues that arise when being a landlord in a most cost-efficient manner. In terms of efficiency, REITs can offer you a far better return on your invested capital than being the landlord of a physical property.
Of course, some folks feel safer owning a tangible asset than a security that can be easily bought and sold like a stock. When you start thinking of REIT shares as pieces of a real estate empire, however, it becomes more apparent that REITs are a far better place to build wealth than physical real estate.
Lazy landlords have a generational opportunity to own prized properties for cheap
Moreover, you can expand your ownership of properties beyond the residential real estate sub-industry. You can own a piece of an office tower, like Calgary’s legendary Bow Tower with H&R REIT (TSX:HR.UN), a part of a shopping centre with a retail REIT, or even mixed-use properties that aim to form a symbiosis between different types of tenants.
Indeed, there are lots of choices as a REIT investor. In this piece, we’ll have a closer look at diversified REIT H&R REIT, which is weighted towards the office and retail properties.
Following the COVID-19 crash, H&R REIT now finds itself down over 56% from its five-year highs. Amid the rush to work and shop from home to avoid contraction of the deadly coronavirus, H&R REIT has seen been feeling a bit of pressure, as its tenant base has fallen upon hard times.
The bullish and bearish viewpoints on H&R REIT
I’m in the firm belief that investors should listen to both the bullish and bearish viewpoints of any given security before initiating a position. Further insight can help investors eliminate confirmation bias and bolster an investment thesis.
Chris MacDonald, my fellow Fool and colleague here at the Motley Fool Canada thinks that H&R REIT is to be avoided following its recent distribution reduction:
“Secular shifts are impacting H&R’s performance. These shifts include work-from-home arrangements away from office-based work. In addition, there is a shift to e-commerce away from traditional brick-and-mortar-retail. We are only seeing the beginning of the impacts of these shifts. The COVID-19 pandemic has simply accelerated these trends forward.”
MacDonald sees H&R REIT falling under “extreme stress” over the next one to five years amid poor rent collection numbers. While MacDonald and I tend to agree on many things, I couldn’t disagree more with regards to his extremely negative outlook on H&R REIT.
I think MacDonald is far too bearish on the name. While the REIT could be under pressure over the next year or two, I believe things will improve with time, as the demand for office and retail space looks to revert towards mean levels amid a normalizing post-COVID economy.
Even the most subtle improvement will be a significant needle-mover on shares of the battered REIT, so investors should back up the truck today while the REIT’s prized properties are priced as if they’re going out of style.
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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 Joey Frenette has no position in any of the stocks mentioned.