Does investing in REITs (real estate investment trust) give similar type of leverage gains as one can see in real property investment?

You may know that real estate investment goes something like this:

Property investors don't pay all cash and use leverage. Leverage increases return per dollar invested.

For example, investors buys $200,000 property for $40,000 cash down payment, and obtains $160,000 financing. If property appreciates 5 percent in market value during the next 12 months, with leverage investor earns 25 percent gross return on his invested dollars ( before considering interest costs, buying, selling, rental expenses and capital gain taxes etc. )

Does leverage principle work on REITs? I can assume that REIT properties are NOT bought in all cash.

Regards,

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Amit Kalia, Broker, REALTOR®
RE/MAX Real Estate Centre., Brokerage
independently owned & operated
100 City Centre Dr, Unit 1-702
Mississauga, ON L5B 2C9
Phone No.: 905-339-5111
Website: https://www.realestate-ontario.com/
Condo Blog: https://condopundit.com/blog/

When you buy units in a trust, you are putting money as a downpayment. So you have to look at the REITs financial reports to figure out what kind of leverage they have. Technically there should be no difference.

But there is. And that difference is the way REITs are managed and how they are taxed. Managed because I find that the overheads outstrip the real growth in asset base. So the expected higher return from expertise and synergy is lost. Second because after a certain size they loose focus and get into property types that are not within their core strength.

Because of the way that REITs are taxed, the net income to the investor is lower than owning your own. REITs usually have the tax/interest balance in it's own favour because they have a variety of investors with different optimal ratios (between tax and interest). As an owner of a property, you can optimize this for your income and adjust annually if need be.

V

Thanks for your reply.

What I understand from your answer is that REITs may not give a better return than one's own carefully selected and managed real property investment both in terms of profit and tax planning. Right?

I am looking at long term (at least 25 years).

What if one buys carefully selected REITs (different sectors -Healthcare, Apartment, Sr. Housing, Retail and Office) in order to save income tax and put them into one's self directed RRSP? So that both the income and capital appreciation are protected from taxes.

Is it possible to direct REIT's cash distributions to buy more REITs on an ongoing basis?

-----------------------------------------------------------------
Amit Kalia, Broker, REALTOR®
RE/MAX Real Estate Centre., Brokerage
independently owned & operated
100 City Centre Dr, Unit 1-702
Mississauga, ON L5B 2C9
Phone No.: 905-339-5111
Website: https://www.realestate-ontario.com/
Condo Blog: https://condopundit.com/blog/