What is the difference between REIT and REIT ETF Canada?
Both REITs and REIT ETFs are structured to pay out dividends to shareholders. And both can generate those dividends through rental income, mortgage interest, or a combination of the two. The difference is that structurally, a REIT ETF is a step removed since it doesn't own property directly.
However, the returns of REIT ETFs may be lower than investing in individual REITs that have the potential to provide higher returns. Investing in individual REITs can also provide the opportunity to invest in properties with higher potential returns, but it also comes with higher risk.
REITs are attractive investments in that they don't require investors to know as much or directly manage the properties as real estate developers do, but they have the potential to pay out hefty dividends.
The largest REIT ETF is the Schwab U.S. REIT ETF SCHH with $5.97B in assets. In the last trailing year, the best-performing REIT ETF was PFFR at 12.54%. The most recent ETF launched in the REIT space was the iREIT - MarketVector Quality REIT Index ETF IRET on 03/06/24.
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
For investors seeking a steady stream of monthly income, real estate investment trusts (REITs) that pay dividends on a monthly basis emerge as a compelling financial strategy. In this article, we unravel two REITs that pay monthly dividends and have yields up to 8%.
Investing in REITs in Canada
The easiest way for investors to add REITs to their investment portfolio is to purchase a REIT ETF through their discount brokerage account. The top REIT ETFs in Canada are BMO's ZRE, Vanguard's VRE and iShares' XRE.
Since they aren't publicly available and don't register with the SEC, it's difficult to pinpoint specific investment minimums. However, investment firm Edward Jones says minimum investments for private REITs can range from $1,000 to $50,000.
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
There's no question that some of the most popular REITs to buy are residential REITS. And while there are several high-quality residential REITs to consider in Canada, two of the best are Canadian Apartment Properties REIT (TSX:CAR. UN) and Morguargd North American Residential REIT (TSX:MRG. UN).
What is Canada's top REIT?
Canadian Apartment Properties REIT (CAPREIT) is the largest residential REIT in Canada, with properties diversified nationwide. It's the go-to investment for many Canadians, considering you can gain exposure to more than 50,000 apartment suites or manufactured housing sites.
REITs offer certain tax advantages to encourage this investment. In Canada, a REIT is not taxed on income and gains from its property rental business. Instead, shareholders are taxed on a REIT's property income when it is distributed, and some investors may be exempt from tax.
The Bottom Line. A REIT ETF allows an investor to gain exposure to the real estate market, without going to the trouble of buying and managing property. These funds also gain exposure to a wide basket of real estate properties, without relying on the performance of any one REIT.
VNQ's woes accelerated over the past month as the ETF fell by an additional ~6.5%, breaking below its previous key support level. This price action coincided with a significant spike in mortgage rates, correlated to the crash in bonds below that market's support level.
Is a Roth or traditional IRA the best choice? To be clear, retirement accounts are ideal places to hold REIT investments, as the benefits of tax-deferred investing can magnify the already tax-advantaged nature of these companies.
Because you're smart, you may be asking yourself, What happens if the short-term interest rate goes up? Any increase in the short-term interest rate eats into the profit—so if it doubled in our example above, there'd be no profit left. And if it goes up even higher, the REIT loses money.
Summary of Why Investors May Not Want to Invest in REITs
But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.
REITs historically perform well during and after recessions | Pensions & Investments.
By default, all dividends distributed by a REIT are considered ordinary, or non-qualified, and are taxed as ordinary income. REIT dividends can be qualified if they meet certain IRS requirements.
| Company (ticker symbol) | Sector | Dividend yield |
|---|---|---|
| ARMOUR Residential REIT (ARR) | Mortgage | 14.7% |
| Ellington Financial (EFC) | Mortgage | 14.4% |
| Chimera Investment (CIM) | Mortgage | 14.3% |
| KKR Real Estate Finance Trust (KREF) | Mortgage | 14.0% |
Do you pay more taxes on REIT dividends?
The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income.
Real estate investment trusts have gone through a difficult and volatile period. Over the past five years ended in December, 2023, the Canadian REIT Index returned 4.19 per cent, including distributions, annualized.
Canadian REITs are a popular choice for income investors seeking reliable cash flow. With their high dividend yields, tax advantages, and diverse property portfolios, they can be a valuable addition to your investment strategy.
Canadian REITs tend to use more debt to finance operations, including mortgages secured by property holdings. Typically, Canadian REITs pay monthly distributions (dividends) as opposed to quarterly payouts for U.S. REITs.
For purposes of the REIT income tests, a non-qualified hedge will produce income that is included in the denominator, but not the numerator. This is generally referred to as “bad” REIT income because it reduces the fraction and makes it more difficult to meet the tests.
