If you're looking to diversify into real estate, but you don't have the capital to buy property, you can make use of the real estate investment trust (REIT).
The REIT is a security composed of real estate related investments. It's kind of like a very specific mutual fund. However, these trusts trade on the exchange like a stock, and they have specific rules that require them to pay out dividends regularly.
I actually hold REITs in my TFSA since they are a good income earning investment, but not necessarily tax efficient. Holding these investments in my TFSA allows me to take advantage of the income they provide, without paying taxes on my earnings.
Building My REIT Portfolio
When I began assembling my portfolio, my first thought was to look into the iShares CDN REIT Sector Index Fund (XRE). I like ETFs, and this one provided me with access to a variety of REITs in one. Unfortunately, it comes with a 0.6% MER. I thought that rather high for an ETF than only has 15 holdings.
I discovered that you can replicate roughly half of the index fund by investing in the four of the largest Canadian REITs, saving the 0.6% expense and possibly reducing risk by buying the more established, large cap, companies. The four largest are:
- RioCan REIT (REI.UN): This is Canada's largest REIT that is focused entirely on retail real estate. If you want access to commercial real estate, like shopping malls and other retail/store properties, this investment is a decent choice.
- H&R REIT (HR.UN): This is another commercial real estate REIT. However, rather than focusing exclusively on retail real estate, this investment includes a number of other types of properties, including offices, single-tenant industrial, and retail. This REIT also includes two development projects.
- Canadian REIT (REF.UN): The CREIT doesn't restrict its holdings to any one specific type of real estate. Instead, this investment focuses on high-quality real estate assets. The company has been able to raise its monthly distributions each year for 11 years in a row. That's not too bad at all.
- Boardwalk REIT (BEI.UN): This REIT is a little different from the others in that it is mainly about the acquisition of the assets related to Boardwalk Equities. Boardwalk has a number of residential multi-family properties, and there is an interest in acquiring more properties. Boardwalk is the largest public owner/operator of multi-family rental communities in Canada.
In order to set up my own REIT portfolio that comes close to their actual weighting in the fund, I set mine up to include 40% in RioCan and 20% for each of the other three.
It's a simple solution, and the overall MER is much lower than buying the larger fund, which comes with the costs that often result when you buy funds of funds.
REITs offer a simple solution for those who are interested in adding real estate to their investments, but don't have huge amounts of capital. On top of that, you avoid the hassles that come with property ownership and management, and you can earn a regular dividend.