How to Get Passive Rental Income With Yields Over 5%

Want to sit back and collect rent from shopping centres and other retail properties? Invest in RioCan Real Estate Investment Trust (TSX:REI.UN) and two other retail REITs.

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You can easily earn passive rental income from retail properties. Simply buy units of a retail real estate investment trust (REIT) just like you would buy shares of a stock. That’s right, you don’t have to seek tenants or manage any properties. Just sit back and collect your monthly income.

You can get 5.2-5.7% yields from these retail REITs immediately, if you so wish!

The largest Canadian REIT

First, there’s RioCan Real Estate Investment Trust (TSX:REI.UN), Canada’s largest REIT with an enterprise value of about $16 billion. It owns shopping centres and has interests in over 350 retail properties.

Its rental income is diversified across 8,000 tenants with no one contributing more than 3.8% rental revenue. RioCan intends to deliver stable and reliable cash distributions to unitholders as it has done since 1995.

At $24.7 per unit, the REIT yields 5.7% and is fairly valued with a price-to-funds-from-operations ratio (P/FFO) of 14.5.

Plaza Retail REIT (TSX:PLZ.UN) is both an owner and developer of retail properties, and it has assets of roughly $1 billion. However, the REIT has had 15 years of profitable growth.

From 2000 to 2014, its funds from operations grew at a compound annual growth rate of 11%. Its unitholders have received increasing income from its growing distribution every year since 2003.

Plaza Retail owns over 300 properties across eight provinces. At about $4.4 per unit, the REIT is slightly undervalued and yields 5.7%. It last increased its distribution in January 2015 by 4.2%.

Smart REIT (TSX:SRU.UN) might sound new to you, but it recently changed its name. It’s good, old Calloway REIT. Smart REIT has about 8.2 billion worth of assets with over 130 shopping centres across Canada.

The REIT has a focus on tenants that are value-oriented retailers, including strong national and regional names and strong neighbourhood merchants. Wal-Mart Stores, Inc. continues to be its dominant anchor tenant. In fact, Wal-Mart contributes to 27.4% of its gross rental revenues.

In the second quarter of 2015, Smart REIT posted high occupancy rates of 98.6%. There’s already 72% of tenant retention as of the end of the second quarter, and the average rental increase was 6.5%. This shows that Smart REIT is creating value for its tenants.

Most of its retail properties are in Ontario (81%), followed by Quebec (20%) and British Columbia (12%).

With a payout ratio of about 82%, Smart REIT was able to increase its distribution in October 2015 by 3.1%. Smart REIT targets a payout ratio of 82-87%. So, there’s likely to be distribution increases in future years. At $31.6 per unit, it yields 5.2%.

In conclusion

If you want to sit back and collect rent of 5.2-5.7%, consider the REITs above.  REITs pay out distributions that are unlike dividends. If you wish to avoid the tax-reporting hassle, you should buy REITs in a TFSA or an RRSP.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Plaza Retail REIT.

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