Canadians have found the Tax-Free Savings Account (TFSA) very useful to create wealth. According to recent data issued by the Canadian Revenue Agency, more than 14 million people have used this savings vehicle since it launched in 2009.
Despite the huge popularity of this savings account, very few Canadians were able to max out their limit — only 10% of total TFSA contributors. By the end of 2017, the average amount of unused TFSA room was almost $31,000.
One obstacle that could have contributed to this spare capacity, in my opinion, is the limited investing opportunities available to common people in this low-rate environment. For conservative investors who don’t like to take too much risk, there aren’t many attractive avenues. The rate on the best GICs for the five-year term, for example, is just over 3% these days.
If you have not yet contributed a single penny through your TFSA, you have $63,500 unused total contribution room through 2019. If you’re one of those who still has some room in the TFSA, then there are many ways you can start accumulating wealth, and one of them is investing in real estate assets. The timing of taking exposure to this asset class becomes more attractive when interest rates are low and demand for rental properties is strong.
Advantage of owning REITs
There are many advantages of owning a real estate asset in your TFSA portfolio. Because real estate has a low correlation to other financial assets, such as stocks and bonds, by adding this asset to your existing portfolio, you can diversify your risks. In a low interest rate environment, for example, property values improve and outperform other assets.
But the problem with this asset class is that not every investor has a means to buy properties and manage them efficiently. It requires a huge financial and time commitment. To solve that problem, retail investors could buy units of real estate investment trusts (REITs). To invest in REITs, you don’t need millions of dollars; you can start with as little as $5,000.
There are many advantages of keeping REITs in your portfolio. One of the biggest is that REITs are run by professional managers who know how to manage real estate assets and get the best returns. The second benefit is that Canada’s tax laws favour REITs, which must distribute at least 90% of their taxable income as dividends to shareholders.
High-yielding but low-risk real estate stocks, such as Artis and Allied Properties could provide steady passive income within your TFSA without getting into the hassle of managing properties.
Another way to take exposure to this asset class is to buy a good-quality REIT ETF. Investing in an ETF could give your TFSA exposure to a basket of REITs and a diverse portfolio of properties across the country with a single investment. In this space, I like iShares S&P/TSX Capped REIT Index ETF.
You should buy REITs if you want to diversify your portfolio and earn passive income within your TFSA. If you don’t already have exposure to REITs, you can invest about 10-15% of your portfolio in a diversified REIT ETF.
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Fool contributor Haris Anwar has no position in the stocks mentioned in this article.