If you’re the type that wants rental income as a part of your diversified income portfolio, but you don’t want to manage properties and deal with tenants, you’re in luck. Real estate investment trusts (REITs) let anyone passively invest in real estate properties.
That’s right. You can sit back and relax and collect monthly rental income without doing anything! Simply buy shares in REITs as you do with stocks.
Here are some REITs that yield 8-12% for your consideration.
First up, is Northview Apartment REIT (TSX:NVU.UN), which costs about $18 per unit and has an 8.9% yield. It owns and manages residential properties primarily in resource provinces, and that’s why its shares are down.
I don’t think its yield is in jeopardy though. Its funds-from-operations payout ratio is only 70%, so there’s a margin of safety protecting its distribution.
Dream Office Real Estate Investment Trst (TSX:D.UN) yields an astounding 12.5% at under $18 per unit. It’s also down partly due to low commodity prices. Specifically, about 26% of its net operating income comes from Alberta.
Dream Office must have its competitive advantages because it continues to maintain occupancy rates a few percentage points above average market levels, even in hard times like this. Further, its top tenants include Bank of Nova Scotia, Telus Corporation, the federal government, and several provincial governments that generate 27.5% of its gross rental revenue.
You may be surprised that it yielded over 17% during the last recession when shares fell to about $12. It didn’t cut its distributions then, so maybe it’s strong enough to maintain distributions this time, too.
Dream Global REIT (TSX:DRG.UN) is another high-yield REIT that owns commercial properties. Its focus is in Germany though. It owns properties in seven major cities. At $8.30 per unit, it yields 9.6%.
Tax on the income
If you’re buying REITs in a TFSA or RRSP, you do not need to worry about the rest of this section. However, if you want to learn about REITs’ tax-advantaged nature, read on.
REITs pay out distributions that are unlike dividends. Distributions can consist of other income, capital gains, foreign non-business income and return of capital. Other income and foreign non-business income are taxed at your marginal tax rate, while capital gains are taxed at half your marginal tax rate.
On the other hand, the return of capital portion reduces your adjusted cost basis. This means that that portion is tax deferred until you sell your units or until your adjusted cost basis turns negative. So, if you buy REIT units in a non-registered account, you’ll need to track the changes in the adjusted cost basis. The T3 that you’ll receive will help you figure out the new adjusted cost basis.
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 have investments in a non-registered account to be exposed to taxation.
Foolish investors looking to boost their income should buy now to lock in these juicy yield. One strategy you can employ is to diversify in to these REITs instead of just buying the highest yield. And you can also average in over time to reduce risk.