Q – I am 32 and own my home. I have just started to look at building an investment strategy, and I am looking into asset classes. I know the general theory of splitting assets broadly between fixed income and equity. My question is about real estate as an investment class. I pride myself on being a homeowner and consider my home an asset class of its own. Do you recommend holding real estate investment trusts (REITs) in addition to owning a home. Wouldn’t this be overweighting real estate, as my major asset is my home? – Sarita R., Winnipeg, Manitoba
A – Congratulations on being a homeowner! Yes, real estate is an asset class, and your home is real estate. But you also have to live in it, and that changes its characteristics as an “investment.” I assume you have a mortgage and that your intention is to pay down the mortgage while you live in the house, building your equity and thus creating a valuable asset for yourself. But your primary objective here is to have a roof overhead for yourself and your family. Its value as an investment “asset class” is incidental, although most residential real estate does appreciate over the years, often at least keeping up with the rate of inflation, with additional gains potential coming at the whim of local market conditions, prevailing interest rates, and location.
But if you acquire a house in order to rent it out to cover the costs of your mortgage and maintenance, you are in effect going into the real estate rental business, hoping to build profit for your business. But this is a different, more complicated story.
As far as real estate investments go, REITs are publicly traded trusts that own real estate, usually commercial buildings, shopping malls, apartments, and condominium buildings. Their income comes in the form of rent paid on properties they own. When you buy a REIT, you become a shareholder in the company. By law, REITs must pay out most of their revenue to shareholders to avoid corporate taxation, which means investors expect to receive a steady stream of income from this type of investment. For this reason, a REIT is not the same type of real estate “investment” as your principal residence. And therefore you are not “overweighting” real estate as an asset class.
REITs are suitable investments for people looking for a steady stream of income. At age 32, I assume you are not necessarily looking for income from your investments, so you might consider growth-type assets, such as equities, instead of income trust units. If you do decide to invest in REITs, consider reinvesting the income in growth assets. – R.T.