Given Canadian housing prices of late, one might think most investors have enough real estate assets as part of their overall portfolio. However, let’s not forget some investors still do rent – and there is absolutely nothing wrong with that.
So, given all the positives that can come with owning Real Estate Investment Trusts (REITs) in your portfolio, one might wonder:
How much real estate should you have in your portfolio?
Well, a reader asked me this very question recently. Let’s unpack that and find out my answer!
Why Real Estate Investment Trusts (REITs) in a portfolio?
“Buy land, they aren’t making it anymore.” – Mark Twain
It’s hard to argue with that thesis.
What are Real Estate Investment Trusts (REITs)?
Why should you consider owning them in your portfolio?
Essentially, a Real Estate Investment Trust is a company that owns a portfolio of income-generating properties. These companies offer investors (like you and me) a way to participate in real estate, including the potential rise in property values, without the headaches of being a landlord. REITs can be an attractive asset class since many companies provide regular distributions, often monthly distributions. For investors that want to hold real estate as part of their portfolio but don’t want to deal with phone calls from cranky tenants, REITs can be an excellent alternative. I happen to own a few REITs myself!
For many reasons, investing in REITs can be a very attractive proposition for Canadians and rightly so. Here are some of the great reasons why being a real estate investor (over some personal investment property) might be appealing to you!
1. REITs offer liquidity
Up until recently, real estate was actually rather difficult to unload in some Canadian markets on demand. Unlike real estate, regardless of the real estate market, I like REITs because you can you can buy or sell as many of your favourite REIT units largely on-demand in the open stock market. With commission-free investing at some discount brokerages now (including with BMO – one of my long-time partners) you can buy REITs at no-cost or near-zero cost when it comes to brorkerge transaction fees.
2. REITs offer tax efficient accounting
Thanks to the Tax Free Savings Account (TFSA), REIT investing can be very tax-efficient…as-in tax-free! There are no small business costs to manage unlike being a landlord owning property. The Registered Retirement Savings Plan (RRSP) is also a great home for your REITs as well – although I personally prefer owning U.S. assets in my RRSP for increased diversification beyond Canadian borders.
Further reading: Check out this older but very relevant post: all about asset location, location, location!
If you decide to invest with REITs inside a taxable account, things get more messy tax wise. REIT distributions can come from multiple sources, such as capital gains, interest and income – and all such sources are taxed differently so buyer beware!
3. REITs offer diversification
Unlike owning one or more rentals on your own, REITs can allow you and I as the retail investor to own hundreds if not thousands of rental units as part of company ownership. If rental units are not for you, you can own REITs that own commercial properties, office buildings, warehousing and more.
How much real estate should you have in your portfolio?
Thanks to a recent reader question, let’s answer this very question!
Hope you are doing well!
I have been your reader for a few years now and have learned a lot. I greatly appreciate all your research, thoughts and perspectives. Now my question: does it make sense to buy a REIT ETF to diversify if I am fully invested in XEQT?
I have searched online for an answer to my question but wasn’t very successful so decided to reach out to you.
Any thoughts would be greatly appreciated!
Thank you Mark and keep up the good work.
Thank you for your readership and question. I’m glad you enjoy the site.
To be honest, I’ll say it really depends on you, and your investing goals.
Are you looking for mostly growth? If so, then XEQT is likely the perfect all-in-one fund for you.
(Further Reading: Check out some of the best all-in-one ETFs to own. XEQT is in that list!)
Are you looking for growth and some income right now? Then, likely some individual REITs and/or a REIT ETF like ZRE from BMO, XRE from iShares, or VRE from Vanguard might be a nice “income kicker”.
You might recall REITs (Real Estate Investment Trusts) are a company that owns, operates or finances income-producing real estate. REITs provide an investment opportunity, like a mutual fund, that makes it possible for any investor investing in the REIT to own real estate.
Like I mentioned above, depending on the company, REITs invest in a wide range of real estate assets, including office buildings, apartment buildings, warehouses, retail centers, medical facilities, data centers, cell towers, infrastructure, hotels and the list goes on. If it’s on land, it could be owned by a REIT!
REITs can offer investors a stream of distribution and rising distributions with time, although nothing is guaranteed.
I’ve provided some quick examples:
- RioCan REIT (REI.UN) is one of Canada’s largest REITs and has been historically a great income distributor. However, the pandemic has not been kind to this REIT for investors. The REI.UN was cut by about 33% last year and has not recovered even though some gains have come back.
Source: RioCan website.
- Summit REIT (SMU.UN) is a fast-growing warehousing REIT. The last year or so has been very kind to investors, over the last year the stock has returned close to 80%.
Disclosure – I own both REITs above at the time of this post, that can be subject to change!
Will the future be friendly for REITs? Overall, I believe yes – so I will personally invest in REITs for some income and some capital gains over time.
However, there are some drawbacks in owning REITs:
- REITs and interest rates have a strong inverse relationship – the higher the interest rates the worse it might be for REITs (since most companies use leverage/borrowing to fund their growth/acquire more assets on land).
- While REITs can add diversification to your investment portfolio beyond other asset classes this does not mean they are not immune to market conditions or major market meltdowns. In the last couple of years, I’ve seen RioCan suffer only to come back (a bit) while warehousing REITs have boomed (see SMU.UN in my example above). All this to say, not all REITs are created equal. Buyer beware. To hedge this latter risk, consider these top REIT ETFs below to avoid over-exposure to any particular company.
Best REIT ETFs in Canada
- BMO Equal Weight REITs Index ETF (ZRE)
- Vanguard Canada FTSE Canadian Capped REIT Index ETF (VRE)
- iShares Canada S&P/TSX Capped REIT Index ETF (XRE)
- CI First Asset Canadian REIT ETF (RIT)
Finally, you don’t have to take my word for it. My friend Jon Chevreau wrote this piece for MoneySense magazine.
How much real estate should you have in a balanced portfolio?
When he asked Adrian Mastracci, portfolio manager with Vancouver-based Lycos Wealth Management about any REIT allocation this is what Adrian said:
“…the REIT idea “makes sense,” but suggests they should not make up more than 5% or 10% of an investor’s total wealth, or not more than 7% of an equity portfolio. “I consider it part of the equity bucket. Publicly traded REITS trade more like equities than real estate.” He advises buying top-quality REITs (or ETFs holding them), diversified across Canada. But he avoids foreign ETFs because “you want the dividends taxed as Canadian dividends.”
That works. I keep my REITs to about 10% in my total investment portfolio. No more.
How much real estate should you have in your portfolio?
Personal finance and investing shall always remain personal – is a constant mantra on this site. However, I must say, if you enjoy getting paid to be an owner in real estate, then REITs as part of your portfolio might be for you.
REITs (as a unique asset class) have historically delivered good returns, with a mix of income for today and some growth over time. With individual REITs there is more investing risk and therefore potentially more reward. If you are unsure of what individual REITs to own then I would strongly encourage you to own one of my four (4) REIT ETF choices above as a small real estate “kicker” to your portfolio. Real estate and REITs are an asset class all to themselves – so consider that information wisely when deciding how much real estate you should own in your portfolio. A bit is probably just fine of course but too much is probably not very healthy and could be risky including banking all your life savings on real estate including your own home.
Got a question for me? I try and answer as many as I can on this site. Check out some of my Frequently Asked Questions on this dedicated page here. If you can’t find what you are looking for please leave me a comment or Contact me. I’ll do my best to get back to you!
Other REIT and great, free, investing reading material:
Check out my ownership of Canadian Apartment Properties REIT – Then and Now.
In REITs or other, should you speculate with your retirement portfolio?
I disagreed with a Yale professor here on asset allocation including REITs.
My portfolio is income cash flow focused and is heavy on REITs, about 20%. However I’ve dumped some of the lower yield ones and replaced them with my favourite REIT ETF, Middlefield’s REIT Index Plus. I also have Middlefield’s leveraged REIT ETF, the Ecommerce one, but on that one I have the preferreds, not the Class As. The preferreds are a pretty good fixed income alternative, protected from up to a 60-70% market drawdown (you have priority claim to the bottom 10$ of value of about a 27$ total NAV of the fund’s two share classes, plus a priority claim the first 5% of the portfolio’s distributions), with a decent 5% distribution. It’s like having a 1st mortgage with an extremely conservative 35-40% LTV on the top tier Canadian REIT universe.
My favourite individual REIT I still have is Automotive Properties. Long term triple net leases on car dealerships. I got it when the distribution was 9%.
20% REITs is an income play for sure. How did you arrive at that number John? Curious. Need for income? Just like the income?
What is the rest of your portfolio in?
Great comment and details BTW.
I followed the old advice about investing in businesses you understand, and as an ex agent for a few years in the 80s, commercial real estate is something I understand. Commercial real estate is the bedrock of a free market economy, society really, and I think of it of as a foundational income source, whereas the investment community tends to just treat it like an oddball sector, sitting over there in the corner.
For a cash flow portfolio, REITs are the perfect way to build for yourself a little income producing mini real estate empire, and if it goes down, everything around you will have crashed first. On the other side of that coin, I’m also a fan of mortgages – that is, if I’m going to loan out money, I want it secured by 1st claim on title to real estate (instead of purchasing bonds, say), so I have a large holding of the publicly traded Mortgage Investment Corporations (MCAN, Atrium), a relatively safe form of high yield fixed income.
REITs and MICs make up about 30%, roughly. The rest is in covered call ETFs, domestic and overseas utilities, banks, that sort of thing. Heavy on hard asset based cash flowing investments as opposed to “vapour” investments like tech stocks. Some is currently in cash as I sold some things off this summer. I also have a very large position in gold, about 15%, some Sprott gold/silver trust units, a bit in miners, and a gold bullion income ETF (HGY) where the income comes from call option writing. The calls are written on 1/3rd of the bullion holding (the SPDR gold trust, GLD) so there is still exposure to most of the spot price change, but it makes a nice 6-7 point stream paid montly from call option premiums.
My cash is being used to bridge finance a CPP/OAS deferral to age 70 (I’m 65, retired since 60). The bridge money for that I moved into an RRSP savings account with EQ Bank, that pays 1.25% interest with federal deposit insurance coverage. Liquid, safe and a rate that can’t be beat for a near zero risk investment, and available to be drawn down to 0 over 4+ years next summer when my wife retires, until I turn 70 Deferral to age 70 will result in the maximum level of inflation protected government “guaranteed” (such as it is) income going through our 70s and 80s, and that plus a DB pension I have means I’ll only have a minor reliance on investment income to get by, and a market crash will only result in a fairly minor “pay cut”.
Basically, I am heavy on hard assets, cash and gold because the world is on the cusp of The Great Deleveraging, the bust of the long term debt cycle, and it’s going to be unpleasant. The world’s debt is way to big to ever pay back from income. There are only two options; inflate the debt away, or default it away in a long slow grind (watch any Lacy Hunt interview). Pick one and hang on, and concentrate on owning tangible things.
You and other retirees I know John are thinking the same thing…re: Great Deleveraging.
On that note, what advice do you have for me in my 40s preparing for semi-retirement in the coming years – re: how to invest? As you know, big fan of dividend stocks and some low-cost ETFs for extra diversification. I will keep a meaningful cash wedge as I enter semi-retirement and my goal is to work, just less, to cover all expenses but not touch my TFSA and I won’t be eligible yet for CPP, OAS or even my LIRA.
Every retiree I seem to talk to of late, is seeking deferral of CPP and OAS. They are trying to plan for that. I think that is very smart personally – shifting both investment risk and longevity risk to those two plans. I hope to do the same.
Thoughts on how I should continue to invest to fight The Great Deleveraging?
Well, like I said, hold mostly hard asset investments, things that are unlikely to vanish into the ether, that pay cash flow from rents or interest, or long term natural gas delivery contracts, etc, not from making widgets. Most of my ETFs are Covered Call ETFs in financials and utilities so I get yield even in a sideways or declining market. There is an interesting new ETF, HDIV, that owns 7 sector covered call ETFs that cover the entire TSX in an all-in-one package, and it uses a little bit of leverage, about 25%, to goose the yield. Pays an 8.7% distribution, but I’d probably prefer an unleveraged version.
Then gold as disaster insurance, 5-10% of portfolio I think most people should have. Just put some in allocated physical, set it aside and forget about it. When your portfolio crashes 40% at some point, gold will surge eventually as everyone panics and runs to safety and gold will surge to #2500 or 3000 or whatever, and it will offset the portfolio pain. I have Sprott gold/silver trust (the Royal Canadian Mint is the custodian), but if I get any more, I’ll buy the Royal Canadian Mint Exchange Traded Receipts (MNT on the TSX), which have a cheaper carry cost than Sprott.
For a cash reserve and a bond substitute, the EQ Bank high interest savings accts are an unbeatable deal.
Then REITs (including overseas, like Inovalis and Health Care Properties) and Mortgage Investment Corporations. MICs are an interesting one. Very short term mortgages, 1-2 years, with high interest rates because they are a second tier lender and are collateral based, not borrower credit rating based, so they pay a 6-7% distribution from mortgage interest. A MIC has to pay out all of its cash flow to shareholders and pays no income tax. A MIC with a largely 1st mortgage portfolio with a conservative LTA, say 60%, has a low capital loss risk, and low interest risk due to the short terms. If interest rates rise the MIC’s cash flow will rise with about a 1-2 year lag as mortgages are rolled over. By high yield fixed income investment standards, reasonably safe. Most investment advisors seem to have no idea what a MIC is. Most are private, but several are publicly traded and I own all of them.
Great stuff. MICs are interesting. I don’t own any but I wouldn’t rule them out to juice my income in the coming decades.
Having a small amount of REITs is a good rule of thumb for diversification. I hold REI.UN as well. It’s one of my favourites. 🙂 I think it has a lot of room to grow over the next few years.
One great thing about REITs is you can get exposure to commercial real estate assets which is hard to do for retail investors.
Nice to hear from you Liquid. Just finished listening to your podcast episode with Explore FI Canada. Great stuff.
I do personally like warehousing REITs (like SMU.UN) since I wouldn’t really own them otherwise. Not sure about owning Twinkies though. 🙂
I have liked REITS since before the name became common. Back in the early 90s, I started to realize the number of the Canadian super-rich whose wealth was based on real estate (the Reichmanns come to mind, though they have had business ups and downs since then, but many others.) So how do I get in on that, not being super-rich or likely to be?
When Ed Sonshine created RealFund in the mid-90s, it sounded like a good thing and I bought some (not enough, but isn’t that always the way?) It turned into RIOCan, and my ACB for the shares in my RRIF (as it now is) is about $5.
Since then I have got a few more – some industrial, some commercial (e.g. the one where the Loblaws companies spun off their real estate), some residential (CanAparts, Crombie). I don’t think it is problematic to make money as a small shareholder of a landlord. As a renter, I think it’s more important to consider whether the landlord is reputable. I don’t believe all housing should be made available on a not-for-profit basis. If one does, then one should not own rental REITs.
While RIOCan took a hit at the start of Covid (shopping centres were already a bit outdated as a business model), as you say, it has come back, and I started low. But many of the others were pretty stable. I don’t consider them a marginal investment, though I try to diversify among economic sectors anyway, and just include real estate as one of the sectors, along with the usual others (energy, financial, utiltities, etc).
One might add that the dividends are pretty attractive for many REITs, though sometimes one does have to watch what the returns are composed of, as you note.
Incredible you “got in” on RioCan around $5. I don’t know anyone else that did that John.
I own the CHP.UN (Loblaws spinoff), CAR.UN and the warehousing one you see in this post SMU.UN. A few hundred shares of each.
How much of your portfolio is in REITs?
We also invest in banks, utilities, healthcare, and other sectors. I don’t like too many eggs in one basket per se. Things can change!
Not enough~6%. Id like to have more than we do.
I may be an outlier, but I see my home as a place to live, an expense and therefore ignore it concerning geographic allocation weightings.
That’s fair. 6% is still good for some diversification.
I wouldn’t mind about 10% or so in REITs for my income kicker but not sure I’d go too much higher than that.
About half is Canada, other is REET. Ya, 10% is probably good. Don’t know if I’ll ever get there.
I’m very happy owning the reits I do. I read Killam expects to skirt much of the 2% rent cap imposed here in NS for next 2 yrs. It doesn’t apply for new tenants moving in. LIKE.
Ha, yes. Indeed. REITs are a nice income kicker. No intention of selling any myself. DRIPping many.
Mine have had fantastic growth beating most of my stocks. Any divvies have been a bonus.
Am just shy of having enough to drip CAR. Maybe I need to fix that.
Ha, been a big fan of CAR.UN 🙂 Just shy of DRIPping that one myself.
LOL, just checked….More than a bit shy with this thing creeping skywards. Need about 77 shares +++ to account for some more growth!!
You know my position already on residential rental properties that are managed as REITs. Until there are extremely strict policies on the funds themselves and the rentals, I feel they should be banned as a commodity. People’s basic fundamental rights should not be lining our pockets.
Commercial and other corporate REITs are typically a business to business transaction that don’t generate profit from an individuals basic need. These in my opinion are fine, such as Smart Center Commercial property management like Tawcan mentions in his recent blog.
We can’t continue pushing this dark side of investing to the side. Yes, I am more than likely to blame as well holding broad index funds and need to take some sort of action myself.
I do Chris and it’s a valid point. Commercial, warehousing and corporate REITs are absolutely out for profits (this you know) but to your point they don’t marginalize people like higher property values do in the same way.
I have no doubt living in Vancouver you’ve done very well with your real estate. So, thoughts? I mean, part of your overall own success is likely from real estate so it can’t be all bad? Or is it?
Actually, I have never once benefited or relied on real estate to improve my situation. I also don’t include my home equity in my SWR calculations or asset tracking. I sold on the prairies and bought for the same value here on the island, my only good luck has been buying before prices skyrocketed. Sure my value has gone up immensely but I look at it a different way. That high real estate price boom here has locked me into my home. I could never find this location for the price again and I could never afford to get back into the market. It is actually something I have future concerns about and being FIWOOT now, I understand what seniors stress about when it comes to home ownership. Also being FIWOOT I wasn’t even able to get a new mortgage from a different bank because they don’t value any of my investments, savings and assets and only care about my monthly income. My only choice was to renew at existing bank. So I can’t get approved for a new mortgage and then if I sold I would never be able to get back into this region.
You and I sound similar Chris.
I couldn’t really care less about how much our home/condo is worth. I need a place to live. Housing is also an expense.
I don’t include our home/condo in any portfolio SWR or other. Where we live is not part of our retirement plan at all. Again, I have to live somewhere whether it is this $900K condo or anywhere else.
“That high real estate price boom here has locked me into my home. I could never find this location for the price again and I could never afford to get back into the market.”
Yes, interesting right? You almost can’t afford to move now….
I should be FIWOOT like you in another 3-4 years but that will be because I can afford to largely “live off dividends” while working part-time.
I actually can’t imagine some stress that some seniors are going through given inflation and real estate prices now. They are somewhat trapped. Healthcare costs are rising. A reckoning is likely to come.
Cheers Mark, these type of conversations and the reality of finance and society are great discussions to have. I always appreciate our back and forth chats.
If one is to own CAD REITs either individually or as an ETF how are they taxed in terms of dividends? Does the .UN mean a taxation that’s different that other Canadian dividends ? Is there a capital gains aspect too distributions?
Great to hear from you!
The “UN” part essentially relates to the old income trust structure of units. Most Canadian REITs have that suffix with “UN” but not all of them.
As far as I know, most REITs operate as a trust structure. You will get a T3 form for taxation purposes.
For any REIT, regardless of the “UN” extension, you must be mindful about how they deliver returns since yes, how they deliver their distributions is taxed differently.
Canada offers special tax treatment for Canadian income trusts. When they flow their income through to their unitholders, the REITs don’t pay much if any corporate tax. Investors pay tax on most of the distributions as ordinary income (although part of some distributions qualify as a tax-free return of capital). Ottawa feels the income-trust business structure is appropriate for real estate investment trusts, or REITs, so it exempted REITs from the income trust tax.
REIT Tax Examples:
1. Other Income = revenue you are getting from the REIT as part of their operating business. This income is taxed at your marginal tax rate just like interest would be taxed.
2. Capital Gains = taxed at half your marginal tax rate.
3. Could be Foreign Non-Business Income = when REIT holds US or foreign properties, the foreign revenue is reported as Foreign Non-Business Income and is taxed at your marginal tax rate.
4. Return of Capital (ROC) = very common = the company is giving you your money back. There is no immediate tax to pay on it as it simply reduces the cost of the share.
To summarize, our tax system is complex and different income sources are taxed differently. This is why if you hold REITs or REIT ETFs – it might make more sense to hold in TFSA or RRSP. No accounting headaches or far less 🙂
Hope that helps a bit!!
Great article Mark! 👍😃 It’s been 2 years that I started to invest in REITs. Since, I didn’t want to select individuals stocks, I decided to go with a REITs ETF (ZRE). I like the income each month into my TFSA. I got around 7%/8% but would likely increase to 10%+. Only down part his MER. Keep up the good work! 📈💰😃👌
ZRE is a great REIT ETF if you don’t want to invest in individual REITs! Meh, MER, still not that bad. This is likely only 5-10% of your portfolio anyhow. Well done!
Hello. I have been selling out of my oil & gas gains. And adding to my reits. Mrt.un plz.un ( like the largest shareholder of these two, maybe a merger?)but I know no thing. My biggie is rit, active management, done very well. Others ax.un nhf.un crr.un nsr.un. Still wondering about next gold run start date? So bought some dc.a for fun, Los Vegas style. Best wishes to all. Rob
I know a few bloggers and investors that own RIT. They like the active money management and it has done well for sure. How much % of REITs do you have in your portfolio Rob? Cheers.
Love me some REITs,but as a homeowner, I feel like we’re already overexposed to the real estate market. An interesting question I have is should one consider their home when determining their global portfolio allocation? For example, we’re 20% invested in Candian equities, but if we include our home, suddenly we’re at 90%+ Candian vs. 10% rest of the world.
I’ve never thought about that before. I would probably keep it separate. My home is local, and my financial assets are global.