Updated: Oct 6, 2021
When we were first starting out, we heard about people in the rental market. They were buying a property, then renting it out and making oodles of cash, was the story. So we decided we wanted a piece of this action, saved up enough for a 20% downpayment on a mortgage, and bought an affordable (cheap) property for under $100k on an acre lot in northern BC. For under $5k and some DIY love, we put in new lino, carpet, trim, and paint. Mortgage rates were approximately 12% at that time, and you could write off the interest payments on rentals as an expense against the rental income. It was a bit of a balancing act at the time, because we did not want to show additional income that could potentially drive our tax rates up, so we kept expenses and rental income more or less the same, providing just enough income to cover the loan payments we had set up. We did this for a few years then we decided to sell and get out of renting. The late night calls on plugged sewers, hassles dealing with renter’s complaints, and general upkeep of an older property just wasn’t worth it to us (me). We came out of it all little bit ahead at the end, and with some insight into the hassle and risks with rentals. Nowadays getting renters out of rentals is very difficult, and there are caps on rent hikes that add some risk, especially today with Covid in play. It can take months and a lawyer's intervention to free up your property for sale. Renters have more rights than the property owners these days, and can make life very difficult for owners if they are want. At the end of this tale is why I now personally prefer REITs (Real Estate Investment Trusts) over owning rental properties, though I would not buy into REITs until 20 years after our house rental experience. Here are 5 good reasons I believe it is better to own REITs.
No Property Management Headaches
The beauty of quality REITs is they do not require any property management on your part. This is already included within the assets they hold. No calls from renters, no lease renewal headaches, no employee or renter problems. No worrying about insurance issues, replacing that roof, or paying your property taxes. No thinking or worrying about when to buy or sell your individual properties. Plus, if you buy your REIT through a discount ETF provider like Vanguard (VRE), you will only pay a modest 0.38% MER (management expense fee) for the overall fund management.
REITS hold a wide swath of other REITs and property assets including care homes, residential, office, retail, and industrial properties. You are not pigeon-holed into one type of asset or property, like a house or a condo, or relying on one holding to deliver your rent cheques. You are not in only one location, which also has single risk implications if that one location's economy tanks. Diversification eliminates the risks involved in losing value and/or income over time. One area does poorly or loses a renter, the others pick up the slack. This could be seen in play during Covid, when care homes were taking a hit over Covid cases. People still needed places to live and/or commercial space, for example, so these sectors powered on. Below VRE (Vanguard Canadian REIT) holdings are shown to give one example of how REITs are constructed.
No Banks To Deal With
No down payments are required to get vested in REITs, no interest on loans, and no tricks like reverse mortgages to get part of your real estate value back out before you die. This is probably one of the most valuable advantages to REITs. Anyone can get started in owning real estate properties and collecting rent cheques without giving up their first-born or making a deal with the banks (devil) in retirement. When buying rentals in Canada, you need to come up with a 20% downpayment. Nowadays this can be $70-100k depending on the value of the home. This alone puts rentals out of reach for many average Canadians or anyone just starting out. That downpayment simply buys you a mortgage, which will cost you even more over the terms you have set. And when many people retire, the bank now offers reverse mortgages. This is just another way for banks to bleed you of the equity in your home over an extended period of time. It is basically another loan with interest that you need to pay off through your estate when you sell or die. If you took that $70k and put it into an REIT like VRE today it would pay you approx $166/month in rent. That’s $1995 a year. This is a better option in my opinion, to keep the banks out of your business as much and as long as possible.
They Follow The Broad Real Estate Market
REITs by design are meant to follow a broad market real estate index, much like stock market index-tracking ETFs are meant to follow stock market indices. They hold many quality assets in many different areas to achieve this target. They will trend up and down with the broad market news, investor sentiment, and property values. Most REITs have enjoyed a 30-40% rebound since the pandemic hit, partly due to recovery and partly due to rising real estate values. REITs are considered to be a hedge against inflation, because they will track increases in inflation as a nature of their construct.
They Pay You Monthly
One nice thing about REITs is they pay you monthly. When you are trying to set up retirement income streams, having monthly dividends makes your life and budgeting a lot easier. If you have $500k (the average price of a Canadian house) invested in an REIT like VRE at todays’ share price, you would own 13,528 shares. This amount is $500,000 divided by today’s price of $36.96/share. VRE is currently paying $.087805 per share per month, so you would recieve income of $1177.62 per month and never have to do anything. This is pretty decent rent on a $500k property with zero effort on your part?
These are all the reasons I love a good index-tracking REIT like VRE. I own quality properties all over Canada with this REIT, and have the best employees and property managers looking after these properties. All this, and all I have to do is plug, or keep plugging, money into it. I can enjoy rent and property value increases without worry, and there is a lot less risk through diversification. I started investing and averaging into VRE, Vanguard’s Canadian REIT, about 10 years ago. I managed to average in over this time period at a share value of approximately $30. At a current share value of nearly $37, I shouldn’t have any problem taking the original equity, or more, out of this investment. Even if you want to buy a first home or a rental property in the future, an REIT can be an easy starting point towards getting there? So what will it be, a rental home or an REIT?