10 Second Take:
Real Estate Investment Trusts — or REITs — are a way to purchase share-like units in a portfolio of income-producing properties, which can include office buildings, retail malls and apartment towers.
What it means:
Much like mutual funds can hold a portfolio of stocks, REITs assemble a group of income-producing properties in which investors can purchase shares. By pooling investor cash, REIT managers buy and run large properties across a spectrum of sectors and locations. They can be set up to hold a single type of property, like apartment buildings or shopping centres, or they can hold a mixture of different types of income-producing real estate. Unlike owning brick-and-mortar property, which can take time to buy and sell, REITs trade on the regular stock markets — which means this investment can be converted to cash more quickly. Furthermore, while you can’t sell one brick from a building to raise cash, you could sell some units of your REIT without divesting the whole position. REITs may not appreciate the same way a piece of real estate does, but investors still look to them to provide relatively stable returns over a long time horizon. From a tax perspective, Canadian REITs are structured in a way that can make this investment attractive when held inside a registered account such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). This is because income from a Canadian REIT enjoys a special tax status. Instead of taxes being due at the corporate level, income generated is taxed in the unitholder’s hands: If the units are held in a registered account, there are tax breaks which can mean more money stays in your pocket. With stable income and a classification that differs from stocks or bonds, REITs are considered by many investors as a method to diversify their portfolios.