Why I'll Never Own Investment Real Estate Ever Again

2022 was a year of big changes for your author. I quit my job, announced my retirement, and, as the year ended, I sold my rental properties to a local investor.

To explain why I got out of the rental business, it’s helpful to look back at how I got into the sector in the first place.

The year was 2001. After a lifetime of my dad owning rental properties, I finally understood enough to grasp the basics. I was desperate to start building my own empire, and property investing seemed like a good place to start.

Nepotism was an added bonus. My very first deal was essentially brought to me on a silver platter, a property I was told I’d better buy or else my dad was adding it to his portfolio. Another was added in 2002 and another again in 2004. I dabbled a little in other forms of real estate investing after that, but stuck with just three properties in the portfolio.

These places were never palaces, even when I bought them. But they were maintained adequately well, with issues fixed as soon as able. I also would waive rent increases for good tenants, knowing there’s value in long-term renters and that turnovers cost money.

But as the years went on, a few big problems started rearing their ugly heads. Insurance became more and more expensive. My old, small houses had to be insured with replacement values of up to 10x the value of the existing structure, since local bylaws said the existing property had to be replaced with something that was at least 1,200 square feet. Additionally, insurance ate up more and more of my return on investment as it increased far more than the rate of inflation.

My old hometown has a lot of things going for it, but growth isn’t one of them. The place is slowly shrinking as folks like me move away. My houses were old and not worth much more than land value, so there was little demand for any local developer to come in and purchase my land to build something new on.

Even though I didn’t get nearly as much in capital gains as, say, a Toronto investor (or even a Calgary investor), my foray into real estate investing was still pretty lucrative. I clipped anywhere from a 12-20% coupon on these properties, depending on the year and any needed repairs. That money was reinvested into all sorts of different assets over the years. Those houses alone didn’t make me financially independent, but they sure helped.

Overall, I’m pleased with the results. But I still think my life would have been better had I put my cash into a bunch of Canadian REITs instead.

The case for REIT investing

One of the reasons why I didn’t put any additional capital into physical real estate after 2004 was I had discovered the world of REITs and the wonders of owning property through these investment vehicles.

After a few years of property ownership (and despite having an excellent property manager who happened to charge me nothing because I was his son), I still had learned a valuable lesson. “Passive” investing in real estate is anything but.

Landlords have to deal with the following:

• Collecting rent

• Chasing late rent

• Showing the property to prospective tenants

• Coordinating repairs and maintenance

• Doing simple repairs yourself to save money

• Paying property-related expenses

• Keeping the books up to date

Ugh. No thank you.

REIT investing has other advantages, too. You get to own things like car dealerships, shopping malls, warehouses, and other asset types individual landlords can only dream about. Economies of scale kick in for these owners, who have much lower operating costs than small owners. And, sometimes, these groups of assets trade at a much lower price than they should. 

That’s how I buy REITs, of course. Each REIT is looked at the same as a piece of real estate. If I see the portfolio is yielding 8-12% (usually because the REIT trades at a discount to the market price for the underlying assets), I take a much closer look. As long as the portfolio seems relatively strong and there aren’t major other issues, I buy.

I sit back, relax, and collect my distributions. Then, as the REIT’s price approaches NAV, I cycle capital out of it and into another cheap asset. 

Say I had discovered REITs in 2001 and put my capital into them. How would I have fared?

Finding REITs in 2001

Although there weren’t so many REITs around in 2001, there were still a few available for me to buy.

Let’s start with RioCan. A $10,000 investment into it would be worth $90,185.60 as of about a month ago, assuming I had reinvested all my dividends.

I’d also have 4,317 shares, which would spin off an annual income of a little more than $4,400. Not bad.

Boardwalk is another REIT that’s been around a long time. It owns apartment buildings in places like Calgary, Edmonton, Saskatoon, and Regina. It would have been a logical choice for young Nelson since he liked residential property.

It actually did a little better than RioCan in terms of total return. 

A little more than 2,000 Boardwalk shares would generate approximately $2,200 per year in annual income today. 

It’s not all great. H&R REIT has long been a stalwart in Canadian REIT portfolios, but it has had some tough times. It cut its dividend during the 2008-09 financial crisis and owned a bunch of regional malls going into COVID. But it still managed to return 7.2% annually since 2001, and that’s not including the Primaris spin-out. 

3,686 H&R shares would generate an annual income of $2,211, meaning a $10,000 investment 21 years ago would have a 22% yield on cost. 

The bottom line

As you can see, owning some of Canada’s oldest publicly traded REITs has been a bit of a mixed bag. Long-term returns have been solid, but nothing spectacular.

And if my physical property averaged 15% per year, they don’t stack up to those returns.

However, I still say I would have been better off had I put that capital into REITs, for a few reasons. Physical real estate came with a certain amount of work, even though I had a property manager. I would have been able to buy a portfolio of REITs and completely forget about them. Liquidity with REITs is a breeze; I got lucky to find a local investor willing to take all my rentals off my hands without having to pay a Realtor.  

The choice is even clearer with the multitude of REITs available today, and I think much of my proceeds will go into undervalued Canadian REITs, like Artis.