Real Estate Investment Trusts, or REITs, are becoming a more popular investment these days for people looking for an alternate source of dividend income. In order to qualify as an REIT, a company must pay out at least 90% of its taxable income to investors. This prevents the trusts from having to pay corporate income tax. This allows investors to invest in these funds as though they themselves owned the property.

It is a great way for people to invest in Real Estate without actually owning a few properties themselves. In Canada, RioCan is one of the largest Real Estate Investment Trusts around. One of the strip malls in your area is probably owned by them. There are three main types of REITs:

1. Equity REITs: These companies purchase properties such as houses, apartment complexes and commercial buildings and lease them to companies in order to generate a cash flow. This is what most people think of when told about Real Estate Investment Trusts. They function much in the same way as individual Real Estate investors, but on a much larger scale.
2.  Mortgage REITs: This form of Real Estate Investment Trusts invest in mortgage securities. These companies invest in long term bonds by using short term funds, and make money from the differences in yields. These companies make a lot of money when times are good, but as soon as that yield curve flattens, or decreases, they lose money. These are much riskier investments, and not a good option in today’s market.
3. Hybrid REITs: As the name suggests, these are Real Estate Investment Trusts which hold a combination of Mortgage and Equity REIT investments.

Real Estate Investment Trusts generally make for a good investment, as does Real Estate in general. Dividend income is relatively stable (as would rent be if you owned an individual investment property). If you’re looking to a good alternative for dividends from a different source than stocks, I would suggest looking into a well-managed Real Estate Investment Trust.  However, I would stay away from Mortgage REITs for the time being, until the yeild curve increases favourably and the market in the United States stabilizes. Invest only in Equity REITs for the time being, unless you have a very high tolerance for risk.

Popularity: 15% [?]

Be it for an RRSP, a 401k, a Roth IRA or any other vehicle of retirement savings using the stock market, if you’re not going to be retiring for another 15 years or so, now is not the time to sell and try to re-invest later. In fact, it’s time to buy!

I’ve had a few people, both online and in real life, ask me whether or not they should sell the stock they own in their retirement savings and take the penalties to avoid the losses. What people don’t understand is that this money won’t be touched for at least 15 to 20 years (if you plan on retiring in the next five to ten years then this doesn’t necessarily apply to you and you may be better off investing in GICs for the remainder of your working life). The way to make money using the stock market is by buying low and selling high.

Right now, given the recession we’re in, people are selling low, when they should be buying low. In 15 years, the stock market will have recuperated and be higher than it is today, making selling stock now virtually useless and a great way to lose money. But by buying now, however, they’re buying low and increasing their chances of higher profits over the long term.

This is why you should be contributing as much as you’re able and allowed to into your retirement fund right now. This is the time when you’re going to be getting deals which will increase the worth of your fund over time. And by no means should you be selling anything right now if you intend to hold onto it for a long period of time. It’s Warren Buffet who says to buy when people get scared and sell when people get greedy. Well, people are scared and selling: this is when you should be buying.

Popularity: 24% [?]

The other website that I run is Real Estate related, as that’s one of my biggest interests. One question I get asked all the time, being a Canadian, is “do you think our housing prices are going to drop like the American ones did?” The answer to this is quite simple: absolutely not!

While over the next few years we may see a slight correction in the market due to the recession which it would be silly to say Canada will avoid, we won’t be seeing anything like what is happening in the USA, mainly for one reason: Canada never had sub-prime mortgages, at least not at a mainstream level like what has taken place in the United States.

Sub-prime mortgages offered people who otherwise wouldn’t be able to afford a home the opportunity to buy one anyways. This artificially inflated demand, which created upwards pressure on prices and led to high housing prices in the USA. Canada has also had a housing boom, but it wasn’t artificial, the economy has been good and as such people have been buying more.

In short, while the American demand was artificial, Canada’s is very real. We will likely see a slowdown in growth, and potentially even a small decrease in housing prices, but it definitely won’t be for the same reason as the American real estate market is in trouble.

Popularity: 12% [?]

Mutual funds are sold as a great investment for retirement and for medium-term savings. However, I’m personally very much of the opinion that mutual funds are among one of the worst investments one can make. To start with, they’re overly diversified, which results in diluted profits. A good friend of mine is a mutual fund investor, and I told him the other day that there were better ways to make his money work for him. After telling me that I should invest in them before telling him what to do, he added “though in your defence, my almost 10k in mutual funds netted me around $10 last year.” Here is a sampling of some RBC mutual funds, and their performance in 2007, 2005 and 2003.

There were some funds that did beat out the market, but these are some of the funds with low and medium risk that RBC carries. Now how did the TSX fare? In 2007, the TSX increased 7.1%, in 2005 it increased 21.9% and in 2003 it increased 24%. Mutual funds rarely beat the market. You’re much better off investing in index funds or in more secure GICs or CDs, depending on your country.

Plus the fees you’ll pay are absolutely awful. There are hidden fees everywhere with mutual funds, just so someone else can be paid enormous sums of money to not beat the market.

There are many better things to do with your money than investing in mutual funds. Even if you don’t have the time, ability, money or will to learn about investing in individual stocks, invest in index funds or just stick the money in a high yield savings account. With a savings account you’ll likely make around 2% less than you would with mutual funds, but your money is guaranteed. With the economy looking the way it is, you want every guarantee you can get when it comes to money.

Popularity: 13% [?]

While I’ve already covered where you should keep your emergency funds, which can be accessed within a week if required, there’s the constant plague of not knowing where to keep one’s longer-term investments, such as a down payment for a house which will be saved for two to three years.

The three most popular options for these types of investments are high-yield savings accounts, mutual funds and CDs (GICs in Canada). While the best investment depends on the economy at the time, as of right now I would personally recommend CDs as being one of the better investments. Mutual funds are a terrible idea as the returns on them, save for a few led by amazing investors (Ken Heebner comes to mind), aren’t worth it at all. Many don’t even outperform the market, and on a year or so, if you look at the charts, you’re likely to only make one or two percent on your investment.

And so the debate becomes: CDs or savings accounts? This is where the economic state of the United States comes into question. Savings accounts generally offer higher percentages than CDs, but are much more volatile. Every time the Fed cuts interest rates, you can expect the rate of your savings account to be reduced by that same amount. CDs have a slightly lower rate, but are guaranteed. Given the way the economy is headed, if you have an investment such as a down payment for a house which you KNOW you won’t access for a couple of years, invest in CDs to avoid seeing your savings account interest rate reduce to below the CD level. It’s an extremely safe investment and guarantees you your rate in a world where it’s almost certain that it will take well over a year for interest rates to rise once again.

Popularity: 10% [?]