Real Estate Investment Trusts: How to Build Your Own REIT Portfolio
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.
Comments
I think owning the stocks individually would be a better option you will safe on the high MER as well you have more options and control over it, you could include some US REIT’s or even other income trusts.
Exactly Ray. I will look into other income trusts as well, once I get these four I can see what the next plan of attack is!
Anyone know what’s happening in the Canadian market for apartment buildings? Market values are down badly in the US. Even if Canada is escaping the worst of the house price drops, apartment prices are likely hit by rising risk aversion and higher cap rates. Impacts residential REITs like bei.un and car.un
Clues on 2009 stolen from
http://www.dtzbarnicke.com
Investment
The supply of quality product for sale could not meet the demands of buyers in 2008. The most sought after products are owned and held by the life companies, REITs, pension funds and other large publicly traded property management groups, forcing buyers to look for value investment in neighboring secondary markets such as Kingston, Kitchener, and London. For the relatively few opportunities that did present themselves in 2008, the market was quick to respond and transactions were completed swiftly.
However, in the third quarter of 2008, the number of active buyers and sellers declined significantly as the credit crunch took many investors out of the game and signs of rising cap rates left sellers reluctant to part with inventory at reduced prices. Transaction volume decreased in 2008 across all product classes and is expected to remain flat in 2009. Many owners will become pressured sellers in order to raise equity to satisfy debt obligations in an environment where financing remains difficult to obtain. With reduced buy-side competition, given the lack of available capital in the market, expect some great opportunities for well capitalized buyers.
REITs like REI.UN and REF.UN are investment trust funds right? If we hold these in TFSA account, are the dividends and capital gain is still tax free like other investments in TFSA ?
If not, how do we calculate the tax ?
BMO Has a reit ETF now..
Altamonte Springs Florida. What about you? We would love to get your feedback on this.
I prefer equal weighting and would have included one more REIT – Allied Properties REIT (AP.UN). I consider Allied to be the strongest one of the bunch but to be safe would suggest an allocation of 20% to each of the top five.
FYI…BMO’s REIT ETF (ZRE) is equal weighted.
I also own AAR.UN, buying on dip, collecting the dividend.
I was told that to invest in a REIT I needed an income of 100k and current holdings in the stock market. Is this correct?