How to Invest in Real Estate in 2023 (Even if Rates Keep Climbing)

The best way to invest in real estate in 2023 if interest rates will continue to climb is through established, dividend-paying REITs.

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Real estate experts say the high-interest storm will extend to next year, because inflation remains stubborn and way above the central bank’s 2% target. With the 6.8% rate in November 2022, expect more rate hikes.

Douglas Porter, the chief economist at Bank of Montreal, said, “The fact that many measures of core inflation are still nudging higher is a clear warning sign of persistent underlying pressures.” Veronica Clark, an economist at Citigroup, predicts a 25-basis-point increases in January and March 2023.

Thus, direct ownership or purchasing physical property isn’t advisable for real estate investors. The better alternatives to earning passive income are two real estate investment trusts (REITs).

Foundation for reliable cash flow

Choice Properties (TSX:CHP.UN) owns and manages a diversified portfolio that consists of high-quality retail (80%), industrial (15%) and mixed-use residential & other (5%) properties. You can purchase this real estate stock for only $14.75 per share. Current investors enjoy a 1.88% year-to-date gain on top of a 4.92% dividend.

The long-standing strategic relationship with Loblaw is the competitive advantage of this $10.67 billion REIT. Choice Properties’s foundation for maintaining reliable cash flow in the retail segment is the long-term leases with grocery stores, pharmacies, and mostly necessity-based tenants.

According to management, the REIT’s focus is long term. Also, the combination of stability and growth should result in net asset value appreciation, stable net operating income (NOI), and capital preservation. While NOI in the nine months that ended September 30, 2022, declined 1.2% to $673.44 million versus the same period in 2021, net income soared 611.1% year over year to $1.32 billion.

At the end of the third quarter (Q3) of 2022, the total number of income-producing properties is 701, while the occupancy rate is 97.7%. Choice Properties continue to capitalize on the immense value opportunity and activate its potential via development projects (21 under development).    

Its president and chief executive officer (CEO) Rael L. Diamond said Choice Properties is well positioned in the current economic environment because of its high-quality tenants, necessity-based portfolio, and industry-leading balance sheet.

The top residential landlord in North America

Morguard North American (TSX:MRG.UN) owns multi-suite residential rental properties in Canada (16) and the United States (27). As of September 30, 2022, the occupancy rates are 98% and 96%, respectively. The share price as of writing is $16 (-6.19% year to date), while the dividend yield is 4.51%.

The primary objective of this $628.4 million REIT is to keep generating stable and growing cash distributions through asset base expansion and active property management, acquisitions, and improvements. Morguard N.A. utilizes revenue management tools to balance rent growth, traffic, and renewal exposure.

In the first three quarters of 2022, rental revenue and NOI increased 11.7% and 16.8% to $203.4 million and $104.75 million versus the same period in 2021. The net income jumped 211.8% year over year to $418.86 million. Cash from operating activities in Q3 2022 climbed 127.6% to $25.78 million versus Q3 2021.

Best route

The Bank of Canada’s exit from its aggressive rate-hike campaign soon is a long shot. However, if you’ll engage in real estate investing in 2023, owning REITs like Choice Properties and Morguard North America is the best route.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Morguard North American Residential Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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