Looking for income but don’t want to be a landlord? Try REITs 101
Up until a few years ago I didn’t know very much about Real Estate Investment Trusts (REITs) but after my experience of being a landlord for a couple of years, I wouldn’t invest in real estate any other way.
A Real Estate Investment Trust (REIT) is best understood as a professionally managed trust that buys and holds real estate properties. They offer investors (like me) a way to participate in real estate, including the potential rise in property values, without the headaches of being a landlord. REITs are an attractive asset class to me since these 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.
Types of REITs
Listed on the TSX and TSX Venture exchanges REITs trade like stock and can be bought and sold at will. There are therefore certainly far more liquid that holding personal real estate or rental units.
For a list of just some of the REITs available to investors, here are some of the constituents of the S&P/TSX Capped REIT Index courtesy of TMX Money – current at the time of this post.
REITs come in different shapes and sizes.
Some REITs focus on commercial real estate; examples include H&R REIT (HR.UN) and Canadian Apartment REIT (CAR.UN).
Others focus on retail properties; a major example is include RioCan (REI.UN).
Others still may hold office or residential or industrial properties or even a mixture of these. There are different flavours for every investor.
REITs pros and cons
I’ve been a fan of Real Estate Investment Trusts (REITs) ever since my wife and I sold our condo a few years ago. We decided to get out of the rental business after we had a major incident with our condo unit in downtown Ottawa. A slow water leak went unreported by our property manager and our tenants for almost a year that ruined our cork flooring throughout the condo unit. After the new flooring was installed and all repairs to the unit below us were completed, we immediately decided to exit the rental business for the foreseeable future.
Along with avoiding a slow water leak in any other rental unit, I think there are other benefits to owning REITs beyond the easy liquidity I wrote about above.
- Returns have been solid – An investor holding ZRE (BMO Equal Weight REITs Index ETF) would have seen returns over 11% since the ETF inception date close to 4 years ago. As noted above, you can also buy the REITs individually on the stock exchange.
- The company’s problem, not yours – The company that bought the real estate property is responsible for managing it (not you) and taking care of expenses such as insurance, taxes, and the mortgage. The trust will then take a certain percentage of the rental charge from tenants and you’ll get some of that income as a distribution.
- Regular passive income, with some precautions – REITs are not generally required to pay Canadian income tax if they distribute all of their net income for tax purposes on an annual basis, so that tax is passed on to you and me, the investor. For this reason, I suggest owning REITs in registered accounts such as RRSPs, RRIFs, RESPs, and TFSAs.
Check out this dedicated Dividends page for some details about being tax efficient when it comes to REITs or other assets.
- With modest yield comes modest risk – REIT income is generally paid out monthly but that depends on the trust. For example, an investor owning 500 shares of one of Canada’s largest REITs, RioCan would see about $60 per month in income at RioCan’s current distribution rate. The yield for REI.UN is approaching 6%, which is solid, but you need to be mindful of how much a trust is paying out compared to the cash it’s producing (known as FFO ratios). You can read some more technical stuff on FFO payout ratios here thanks to this Globe and Mail article. Just like our personal finances, REITs that payout more than they make is not a sustainable model.
Closing thoughts on REITs
With our Bank of Canada in no rush to raise interest rates in the short-term, I believe REITs can offer steady income today and some portfolio growth over time. The future is always uncertain however!
At the time of this post, REIT prices now represent a decent buying opportunity. REITs can provide some spice to an investment portfolio. When considering REITs be mindful however how much real estate you already own (including equity in your own home) and as always, be sure this investment choice aligns nicely with your investment plan.
What’s your take on REITs? Own some? Want to own some? Do you prefer being a landlord instead?
Hey Mark, excellent post here! 🙂
We have been lucky with our tenants, in large part because we are near the university, and rent is expensive here. We rent to grad students since they are mature and focused on their career and education.
Regarding REITs I want them so bad!! RioCan with H&R REIT is where I am looking right now. That pretty well gives me a third of XRE. If I end up transferring a chunk of my TFSA into my RRSP, I may sell my winners and go this route…
Yeah, you know as well as I do REITs are still a decent deal right now. Hard to go wrong with the top holdings of XRE and buy and hold and hold them.
Continued good luck with the tenants, that’s good news they are mature and focused.
Sorry to hear about the incident regarding your rental. We have a rental unit and everything has been ok so far, but I realize all it takes is for one bad tenant to cause tons of headaches. I own RioCan as well and the historical returns have been solid
Thanks Dan. Life happens. If everything is going OK, good stuff.
We just had a bad few breaks but I learned not to go back to renting, at least not in the short-term. I’ll take my indirect rental income from REITs 🙂
I am a huge fan of REITs and real estate companies over having a rental property. Your personal experience is mirrored by many. When it comes down to the financial calculations, it is rare to see a property beat out the efficiency of a REIT.
I am learning a ton of info here. Just a pleasure to read the blog and the great contributions from other readers. I have yet entered the ETF market or individual stocks.
That’s the great thing about the site unbalanced, I enjoy reading what people write back, comment on, and challenging each other on. It makes for a good learning environment, including takeaways for me. I hope you continue to follow along.
Thanks for covering this topic. Recently I’ve been contemplating about having a few in my portfolio and this is the push that I need.
It’s definitely worth reading more about Ross, understanding what REITs are, how they are different than common stocks, how they distribute their capital, etc. That can be a small yet powerful component to any portfolio. Thanks for reading.
Your list omits some good REITS in my opinion, the Canadian tire REIT, CRT.UN, choice properties reit, CHP.UN and Dundee Industrial, DIR.UN.
Also, where does BIP.UN fit in, in your opinion?
You’re right Matt, some REITs are not on that list. I just took what was in the REIT index. CHP.UN is one that has my curiosity.
BIP.UN is part of the Brookfield family. BIP.UN invests in the transportation industry, utilities and energy sector. It’s not a REIT. They pay their dividends in USD $$ so it might be good to hold in an RRSP or USD $$ TFSA.
Wow, that sounds like an awful ordeal you had with your rental condo. I would have exited the market, too! I have never really looked into REITs, but you’ve piqued my interest.
It was a mess. I wonder if we didn’t go through our headaches, we wouldn’t have still been a landlord today? Anyhow, REITs are much easier to own in my opinion. Check them out when you can Daisy, they are worth understanding at least.
I agree with you about not wanting to own a rental property and be a landlord – no thanks! I’ve owned RioCan for almost five years, and just bought another 100 shares before Christmas. It makes up about 5-7% of my overall portfolio. I’d like to see them increase distributions at some point in the near future.
I had Cominar REIT in my TFSA, but sold it when we bought our house a few years ago.
Have you looked at the new Loblaw spinoff, Choice Properties REIT (CHP.UN)? Decent yield at 6.2%
Good call on REI.UN, certainly getting in many years ago. I think REITs make up close to 10% of my portfolio, and REI.UN is one of them. I own a few more, they all currently DRIP, which is partly why the dividend income keeps going up month after month; the compounding machine is starting to roll.
I haven’t looked at CHP.UN yet but intend to. Very nice yield actually.
Great overview, MOA.
I looked into some investment properties recently, but decided that I am better off investing in REITs and avoid all the headaches that come with managing the property.
Thanks R2R. After our headaches of being a landlord, I’ve decided REITs are the way to go for the foreseeable future.