Real estate has an allure that few other assets can match. Its tangibility, stability, and evergreen nature make it an asset class almost everyone wants a piece of. However, the charms of real estate also come with specific challenges — the most significant of which is the cost barrier.
Even the paltriest real estate assets cost a sizeable sum, especially if you want to buy close to home and live in one of the main metropolitans. If you involve financing in the mix, especially when the interest rates are low, you may need to spend decades and hundreds of thousands “building” your asset, during which it might not offer any returns (other than the price appreciation and your equity).
And contrary to popular belief, real estate is not infallible. Real estate going down was one of the primary triggers of the Great Recession, and even though we are far from it, the Canadian housing bubble is its own dangerous species, making residential real estate a tricky investment.
The solution to both the cost barrier and getting around housing market uncertainty is quite simple: commercial REITs.
Health properties REIT
One of the best reasons to invest in real estate through REITs is that you can gain exposure to property classes you wouldn’t have access to otherwise, and NorthWest Health Properties REIT (TSX:NWH.UN) is a perfect example. You invest in a marvelous geographically diversified portfolio of healthcare properties through this REIT.
Since healthcare is an evergreen business, financial stability is quite inherent with this particular property class. And financial stability translates well into dividends, even if it doesn’t reflect in the capital-appreciation potential of the REIT.
NorthWest is currently offering a juicy 5.9% yield at a stable payout ratio. The REIT maintained a relatively healthy payout ratio, even in 2020 and sustained its dividends, thanks partly to the virtue of the underlying asset class.
An industrial REIT
If capital appreciation is your goal, Dream Industrial REIT (TSX:DIR.UN) is a pretty decent option. But that doesn’t mean it only offers growth potential. It also comes with a robust 4.5% yield, making it one of the few REITs with such a healthy growth and dividend potential mix.
The REIT saw a price hike of 80% in the last five years, which annualized, translates into a pretty decent number. And considering the current undervaluation, the prospect of a price rise in the coming years is relatively bright.
However, the REIT is currently sliding down. The price discount (form the peak) is already at 12% and growing. And if you wait for the dip to materialize fully, you may be able to lock in a much tastier yield.
Foolish takeaway
An investment in commercial real estate has its own sets of challenges and risks, and they are mostly associated with the type of assets you have exposure to. Healthcare properties are almost always stable, regardless of the market and economic conditions. Industrial properties, especially the kind Dream Industrial owns, are growing in value thanks to the e-commerce boom.
