Many people view real estate as a solid asset class. That’s logical because real estate can generate cash flows in the form of monthly rent. However, real estate investing requires a lot of capital up front. To buy properties, most investors need to borrow money by getting a mortgage and paying interest.
Carrying a mortgage on your back can be stressful, and it’s not for everyone. If real estate investing is not for you, you don’t need to feel left out because you can get passive rent from real estate investment trusts (REITs) instead.
REITs collect rent from the many properties they own and manage, and they pay out most of that cash flow as distributions. By buying REITs in a TFSA, you can get tax-free income immediately. In fact, there are several reasonably priced REITs that yield more than 8% today. These REITs conveniently pay monthly distributions.
Dream Global REIT (TSX:DRG.UN) is the ticket for investors to gain exposure to the European real estate market. The REIT focuses its efforts on the seven biggest office markets in Germany, including the cities of Hamburg, Dusseldorf, Cologne, Frankfurt, Stuttgart, Munich, and Berlin.
Dream Global’s portfolio totals 13.4 million square feet of office and mixed-use space, equating to $2.8 billion of assets. The REIT’s fundamentals improved in 2015 compared with 2014.
Its portfolio occupancy at the end of 2015 was 87.5%, which was 2.2% higher than in 2014. As well, it experienced lower debt levels and 8.4% higher average in-place net rent per square feet. Additionally, its weighted average interest rate reduced 74 basis points to 2.49%.
In 2015 the Dream Global team successfully kept the tenant retention ratio at 79%, which is high. Furthermore, the REIT acquired $500 million of high-quality office properties, including the expansion into Vienna, Austria.
Altogether, the above factors improve the reliability of Dream Global’s 9% yield. At $8.90 per unit, Dream Global trades at a reasonable multiple of 11.3. Unitholders can opt to reinvest its distributions with an automatic discount of 4%.
NorthWest Health Prop Real Est Inv Trust (TSX:NWH.UN) is Canada’s largest non-government owner and manager of medical office buildings and healthcare facilities with concentrations in Calgary, Edmonton, Toronto, Montreal, Quebec City, and Halifax.
Overall, the REIT owns and operates a diversified portfolio of 123 healthcare properties, totaling about eight million square feet across 1,900 tenants in the major markets of Canada, Brazil, Germany, Australia, and New Zealand.
At $9.35 per unit, NorthWest yields almost 8.6% and is fairly valued. Unitholders can opt to reinvest its distributions with an automatic discount of 3%.
Conclusion
REITs pay out distributions that are like dividends but are taxed differently. If you wish to avoid the different tax-reporting hassle, buy REITs in TFSAs to earn tax-free monthly income.
However, investors may also be interested to know that in non-registered accounts, the return-of-capital portion of REIT distributions is tax deferred until unitholders sell or adjusted cost basis turns negative.
If you’re looking for a high income, consider Dream Global and NorthWest for yields of more than 8% and view their monthly distributions as passive rent.
