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The Benefits of Real Estate Alternatives

By August 11, 2019 November 29th, 2019 No Comments

Paul

We’re back with our guest host, Rob Tetrault. He’s head of the Tetrault Wealth Advisory Group at Canaccord Genuity in Winnipeg. He’s on a trip to Toronto; we get to talk to him when he comes to Toronto.

You want to talk about real estate investing, and you’re not talking about publicly traded REITs – for many Canadian investors, that is what investing in real estate is.

Rob

Yeah. And the thing with REITs is that – I believe in real estate and I’ve owned it personally my whole life –real estate I think makes sense in portfolios through REITs.

But some people don’t like the volatility, right? When the market moves, the baby gets thrown out with the bathwater. Whether or not the return or the NOI on these REITs changes, they go down. They were down a ton last year in Q4, and they’re down every time there’s a correction. One of the things we look at is investing in either private REITs, or limited partnerships, or something like that.

A client can get direct exposure to a real estate block through private REITs. They don’t trade on the public markets and they are liquid. The neat thing about that is you don’t have to worry about the big swings in a portfolio. You don’t have to worry about seeing that big swing.

If you own a piece of real estate; Paul, if you and I own an apartment block, on a day to day basis we don’t know if it’s up or down 10 or 20%, because there’s no bid, right? We don’t know exactly what it’s worth. But we like the fact that we get the stable income, right? The stable cashflow.

Paul

What about tax treatment?

Rob

It’s unbelievable when it comes to tax treatment. A lot of these buildings, as you know, become return of capital; you get to depreciate the value of the building. And you get what’s called ROC.

These are perfect for corporate accounts, investment accounts, non-registered accounts, anything where you’ve got to pay tax; specifically, on the corporation side where there’s a grind on your small business tax.

If you’re getting close to that 50 grand of income on the million dollars in a passive income Corp, these are fantastic because they don’t show up as income for your corporation.

Paul

Investors can gain exposure to publicly traded REITs simply by going to the discount brokerage account and clicking on by. How do they get exposure to these non-publicly traded entities?

Rob

Yeah, I’d be very cautious to investors trying to do this on their own. I mean go ahead if you’d like, but you do have to find someone who does the due diligence for you. The key with these is they are not publicly traded. A lot of times they’re accredit credit investors only or you need a portfolio manager to actually do the transaction for you.

And there is a whole bunch of due diligence that I would suggest if you’re doing iake sure your PM is doing the due diligence on these; they’re not for everyone. But the neat thing is, you’re making money three ways Paul.

The first one is through cashflow. Ideally you can get a piece of property, or piece of real estate that’s cash flowing after expenses that’s actually cash flowing properly. If you can get 4 or 5, maybe 6% on a cashflow basis, that’s fantastic too.

You’re paying down that debt, right? You’ve got a mortgage on that; you’re making 4 or 5% there, and you get a little bit of growth. I’m not talking Toronto or Vancouver Gross; you don’t need 10 or 15 or 20% growth.

But if you can get a nice 2 or 3 or 4% growth in a nice stable market, that gives you a nice 10, 12, 15% return. And that’s how you get reduced volatility with good returns.

Paul

We’ll leave it there. It was a busy morning. Thanks for helping us out a lot along the way.

Rob

Thanks, Paul.

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