Today we’re talking about real estate investments. There are many ways to own it, but what is the best way and how do you hold it in your portfolios?
Many people out there believe the best way to invest in the real estate market, is to purchase blocks such as duplexes, townhouses or even entire apartment blocks.
By directly owning physical real estate, you now must interview potential tenants, collect the rent, pay down the mortgage, pay down the insurance, account for potential vacancy and hopefully you are cash flow positive.
That’s certainly one strategy that works for many successful investors and how many investor’s start dabbling in the market. The downside of course, is that this requires a large amount of capital and a low liquidity to access your capital.
For me, for my life and most of my clients who are busy, it really doesn’t work. So, what I like to do, a simple yet effective way to invest in real estate is through your portfolio.
Is real estate a good investment and how does it fit into your portfolio?
Real Estate Investment Trusts (REITs)
One great option you can add to your portfolio is a publicly traded real estate investment trust (REIT).
These can be a fantastic source for additional yield. Since they are publicly traded, they are also liquid, allowing you to move in and out of the positions as you wish. Now, the downside is increased volatility in this market space.
Even though do pay tax efficient income, they may or may not be suitable for your portfolio’s risk tolerance. The tax efficient income generated is in the form of, return of capital (RoC).
The great thing about RoC, it aims to defer the taxation by reducing the adjusted cost base (ACB), so the taxation is a capital gain when you sell your position.
If it’s a corporate account or a non-registered investment account, you get the benefit of deferring the income and controlling when you pay the tax on it. RoC is a fantastic way to earn tax efficient income, especially if you’re in a high tax bracket or if this in a corporate account.
A potentially better way to own real estate and what we really like to focus on for our clients at the Tétrault Wealth Advisory Group, is either a private REIT that’s not publicly traded or even the limited partnership investment.
Private REITS or Limited Partnership Investments, are two separate things that are a really, really great way to invest. Our clients who are invested in such a strategy, get much better returns with decreased volatility on their statements.
One such Private REIT that we like, is based the US, and we’ve generated about 15 percent returns consistently in this investment.
The income is generated as tax efficient return of capital. It’s a one-year minimum hold, but there’s full liquidity 30 days after and they’ve averaged 15 percent, so that’s a fantastic way to add quality defensive positions to a portfolio.
Limited partnership is another strategy that works for some clients. It is a structured group of investors, like-minded individuals that want to own real estate.
We will go out, we’ll work with the developer, we’ll work with the builder, we will structure this and then we will borrow generally about 70 or 75 percent, 20 to 25 percent will be the equity. So that’s capital we’re putting in.
You borrow for the rest and you end up either building or buying townhouses or apartment blocks and you borrow for a ton of it. And the cool thing about that is that you get, you know, 10, 15, 20, 30 partners in, usually on the high net worth side and there you can generate some significant returns.
We’re always wanting to generate at least 12 or 13 percent return on investment (RoI) when we are doing these types of investment strategies.
Conclusion – Buying Investment Property
So to recap, you can go out, you can buy a townhouse, you can buy a rental, a Condo, you can take care of the renting it out by yourself, you can change the locks, you can kick the tenant out, you can deal with rent control, you can try to do that yourself.
However, if you are like most clients, you’re busy and don’t have time for all of this, you could let the best professionals work with you to create the best real estate investment strategy for you.
That is what we do every day for our clients at the Tetrault Wealth Advisory Group! We review, analyze and find the best teams to manage these properties, find the best possible area in the best possible investment structure.
In addition to having a well-diversified portfolio of stocks or bonds, we add quality defensive position in real estate.
This is an actual piece of property that you can touch, you can feel it, you can drive by it. This is what I own, it is in some of our client’s portfolios, and it can be in yours too.
One of the highlights of the real estate portion of a portfolio is that it is uncorrelated to your market-based stock or bond portfolio.
Unfortunately, most large investment firms or big banks in Canada do not offer this as a strategy for their clients, which is why the Tetrault Wealth Advisory Group can provide you with the best overall options for your investment portfolio. We truly think adding a position in Real Estate is a fantastic alternative for our clients to own in their portfolio.