Some investors invest in rental properties for rental income. Those properties require a huge amount of capital up front. Additionally, they also need maintenance and require dealing with tenants.
By investing in real estate investment trusts (REITs) instead, investors can invest a small amount and still receive a juicy monthly income. Further, a professional management team takes care of the properties and the tenants, so you don’t have to. REITs such as Artis Real Estate Investment Trust (TSX: AX.UN) and American Hotel Income Properties REIT LP (TSX: HOT.UN) hold dozens of properties, so you’re diversified right away.
About Artis REIT
Artis owns interests in office, industrial, and retail properties that comprised 251 properties and about 26.2 million square feet of leasable area at the end of September. Artis’s price has fallen about 27% from its 52-week high, likely because of its Albertan exposure. However, it has maintained committed occupancy of over 90%. As of the end of September, its Canadian portfolio occupancy was 93.9% and its U.S. portfolio occupancy was 94.6%.
The REIT’s asset mix is about 50% office, 26% retail, and 24% industrial. In the quarter that ended in September, Artis generated 28% of net operating income (NOI) from the United States, 35.5% from Alberta, 11.6% from Manitoba, 10.2% from Ontario, 8.9% from British Columbia, and 5.8% from Saskatchewan.
About American Hotel Income Properties REIT LP
American Hotel was the best-performing North American hotel REIT last year. It has 80 hotels with 7,048 guest rooms in 27 states in the United States. Of its hotels, 45 are rail properties, and they generated 41% of its NOI in the nine months that ended in September, and 35 of its hotels are branded properties; they generated 59% of its NOI in the same period. In total, the REIT generated US$37.8 million of NOI in that period.
American Hotel pays a monthly cash distribution of $0.075 per unit, but will switch to a U.S. dollar-denominated distribution of US$0.054 per unit in May for its April distribution.
Since April 2013 American Hotel has maintained a monthly distribution of $0.075 per unit. In the same period its funds from operations (FFO) have been growing at a double-digit rate. Growing cash flows combined with its adjusted FFO payout ratio of about 70% gives the REIT’s distribution a margin of safety because its occupancy was 78% at the end of September.
American Hotel is a Canadian limited partnership and its 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.
So, it’s probably best to hold American Hotel in an RRSP or RRIF because the REIT’s distribution may consist of U.S.-sourced dividends, which have a 15% withholding tax if shares are held in other accounts. When in doubt, consult a tax professional.
How to receive $1,000 in monthly income
Buying 13,334 units of American Hotel at $10 per unit would cost a total of $133,340. You’d receive $1,000 per month, a yield of 9%.
Most of us probably don’t have that kind of cash lying around. No problem. You could buy 6,667 units at $10, costing a total of $66,670, and you’d receive $500 per month and still get a 9% yield from your investment.
Okay, $66,670 is still too much. Instead, you could buy 1,334 units at $10 per unit, costing $13,340, and you’d receive $100 per month.
See what I’m getting at? You’d receive that 9% annual income no matter how much you invest. And the investment amount is up to you. Similar calculations can be done for an Artis investment:
| AX.UN Investment | HOT.UN Investment | Annual Income |
| $126,316 | $133,340 | $12,000 |
| $63,158 | $66,670 | $6,000 |
| $12,632 | $13,340 | $1,200 |
In conclusion
Earning $12,000 in annual income from Artis or American Hotel only costs as much as $133,340 today. These potential income investments are cheaper than a rental property, but generate as much income.
If you’re looking for investments with a high, consistent income and potential price appreciation, consider Artis and American Hotel as a part of your diversified portfolio. They offer an above-average yield of at least 9% today.
