3 Reasons to Buy REITs Instead of Real Estate

Even Warren Buffett has valid reasons why he prefers REITs over real estate. For income investors, RioCan stock still pays a decent dividend yield and is well positioned for a comeback in 2021.

| More on:

Some people become real estate millionaires, even if they don’t own real estate. Not everyone is cut out to be landlords or manage individual properties. However, they can still receive rental-like income. Real estate investment trusts (REITs) are alternative investments to create wealth in the real estate sector.

Warren Buffett, for instance, rarely invests in real estate. The value investor bought his modest home in Omaha, Nebraska, in 1958 but has never relocated since. While his property is only .001% of his overall wealth, he said it was his third-best investment ever.

As of December 31, 2020, Buffett, through Berkshire Hathaway, has only one REIT investment. Store Capital is the odd man out, considering that the real estate sector isn’t popular with the GOAT of investing. Still, people will listen to Buffett’s reasons why REITs are better investment choices than owning actual real estate.

Know your limitations

Buffett admits that his conglomerate can’t compete with gurus or experts in the real estate space. Most real estate investors often overestimate their abilities to manage rental properties. Watching a YouTube video won’t make you a successful landlord. The reality is different. Warren Buffett advises people to be very realistic about their limitations. You can only achieve good results in rental properties if you’re 100% focused on real estate.

Overvalued market

In Canada, housing markets are red hot, although it’s not reflected in REITs’ performance. The retail or commercial sectors are challenged and continue to struggle. Also, the bubble could burst anytime soon and send prices plunging. While mispricing in real estate is rare, says Buffett, you’re likely to find better deals in the stock market, including REITs. The underlying properties are more valuable than ever.

Management intensive

Besides a smaller cash outlay than acquiring actual properties, REITs come without headaches. Rental properties are management intensive as you must deal with tenants, vacancy risks, and maintenance costs. Thus, property management expenses could eat up a chunk of your profitability. With REITs, you’re a mock landlord collecting rent minus the inherent responsibilities.

Strong comeback

RioCan (TSX:REI.UN), a top Canadian REIT, suffered the worst during the COVID-19 year. Investors didn’t expect the health crisis to force management’s hands to slash dividends by 33%. The move was necessary to preserve or maintain the strongest balance sheet as much as possible.

Besides the haircut on dividends, investors lost 31.8% on the stock in 2020. Thus far, in 2021, the share price is $21.02 — a year-to-date gain of 27.6%. If you were to invest today, the $6.68 billion REIT pays a respectable 4.59% dividend.

For 2020, RioCan reported a net loss of $64.8 billion versus the $775.8 net income in 2019. Because of the pandemic’s unparalleled impact on the business, rent collections suffered while the active transaction market was fewer. Tenant restructuring was the predominant activity.

Nevertheless, RioCan is confident it could bounce back from the carnage. The robust pipeline and development program should deliver new and diversified sources of income and cash flow. The move to shift away from retail to mixed-use properties is a clever strategy. Investors should be happy.

Discounted opportunities

Value investors like Buffett prey on high-quality assets at a discount to fair value. RioCan and similar REITs are discounted opportunities. You don’t need to scale or manage yet receive passive income as a real landlord would.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short January 2023 $200 puts on Berkshire Hathaway (B shares), short June 2021 $240 calls on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares).

More on Dividend Stocks

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How to Use Your TFSA to Earn up to $6,000 Per Year in Tax-Free Passive Income

A high return doesn't mean you have to make a high investment -- or a risky one -- especially with…

Read more »

path road success business
Dividend Stocks

2 High-Yield Dividend Stocks to Buy Hand Over Fist and 1 to Avoid

High yields are great and all, but only if returns come with them. And while two of these might, another…

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 7% Dividend Stock Pays Cash Every Month

A high dividend yield isn't everything. But when it pays out each month and offers this stability, it's worth considering!

Read more »

young people stare at smartphones
Dividend Stocks

GST/HST “Vacation”: Everything Canadians Need to Know

The GST/HST "vacation" is a little treat for the holidays, along with a $250 payment. What should you do with…

Read more »

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »