Real estate investment trusts (REITs) are great investments for receiving passive rental income. You don’t need to manage buying, selling, or even maintenance of any properties. You don’t need to maintain a good relationship with tenants. A professional team does all that for you.
I also like that Canadian REITs pay out monthly distributions, just like you would receive from monthly rental income if you had your own rental properties. Further, many REITs pay out an above-average yield of greater than 3% so that you can receive a safe, stable income, while you sit back and relax. Here are three REITs for you to consider.
A healthcare REIT with a 10.3% yield
Northwest Healthcare Properties REIT (TSX:NWH.UN) is the only Canadian REIT that gives investors a chance to receive global rental income from medical office buildings, clinics, and hospitals, but its market capitalization is only $412 million, so interested investors should have a limit order set to the latest date possible when buying its units.
Northwest Healthcare owns 122 income-producing properties across major markets in Canada, Brazil, Germany, Australia, and New Zealand, while it maintains a high occupancy rate just under 94%.
Its payout ratio is a bit high at 92%, but the REIT started buying back 10% of its public float for cancellation starting in July 10, 2015 for the next 12 months, indicating the units may be worth more than the market price. Unit holders can also reinvest the distributions at a 3% discount to market price.
An office REIT with a 9.9% yield
Dream Office REIT (TSX:D.UN) rents out office properties to roughly 2,200 tenants. Its central business district properties generate about 70% of its net operating income. In March 2015 its occupancy level was just under 93%, and with a payout ratio of 80%, its 9.9% yield is safe.
The REIT’s consensus net asset value was about $30 in March 2015, while its shares today are $22.8, indicating a discount of 24%. To confirm the shares are cheap, its P/B is at a decade low, which occurred in 2008 during the financial crisis.
Unitholders can opt to reinvest the distributions at a 4% discount to market price.
A residential REIT with a 7.9% yield
It’s exciting times for Northern Property REIT (TSX:NPR.UN) and its unit holders. The REIT will become the third-largest publicly traded multi-family REIT in Canada once it closes its acquisitions of True North Apartment REIT Trust and $535 million of multi-family portfolio from Starlight Investments Ltd.
Those transactions will result in a more liquid stock, and a geographically diversified portfolio of more than 24,300 multi-family suites across eight provinces and two territories.
From 2002 to 2014 Northern Property has never cut its distribution, but increased it eight times over a 12-year period. If you had invested in Northern Property in 2002, your income from it would have increased by 41.7%. With the payout ratio under 70%, its distributions remain sustainable and has room to grow.
Tax on the income
REITs pay out distributions that can consist of other income, capital gains, foreign non-business income, and return of capital. Other income and foreign non-business income is taxed at your marginal tax rate, while capital gains are taxed at half your marginal tax rate.
To avoid any headaches when reporting taxes, buy and hold REIT units in a TFSA or an RRSP. However, the return of capital portion of the distribution is tax deferred. So, it may be worth the hassle to buy REITs with a high return of capital in a non-registered account.
Of course, each investor will need to look at their own situation. For instance, if you have room in your TFSA, it doesn’t make sense to hold investments in a non-registered account to be exposed to taxation.
Perhaps it’s in anticipation of interest rate hikes, and perhaps some REITs are affected by the low oil price environment, but all three REITs have experienced pullbacks and are priced at a margin of safety, and are paying out historically high yields. So, Foolish income investors should consider them to boost their current income.
Fool contributor Kay Ng owns shares of DUNDEE REAL ESTATE INVESTMENT TRUST, NORTHERN PROPERTY REIT, and NORTHWEST HEALTHCARE PPTYS REIT UNITS.