Love Passive Income? Here’s How to Make Plenty of It as a Real Estate Investor

REITs can be a profitable way of earning passive income without rental property.

| More on:
ETF chart stocks

Image source: Getty Images

Everyone knows that investing in a rental property is one of the most lucrative ways of earning passive income. However, the red-hot Canadian housing market has priced out many investors. Fear not, there is still an alternative investment for those desiring real estate exposure and passive income.

Buying shares in a real estate investment trust, or REIT, can be a great way of diversifying a stock portfolio. As a fund of real estate assets trading on a stock exchange, REITs offer real estate exposure at a low cost, along with high monthly dividends.

However, picking the right REIT to invest in can be difficult. While you get caught up reading the recommendations from the other Foolish writers, my suggestion is an exchange-traded fund (ETF) that holds a diversified portfolio of REITs. Here’s why.

Why REITs? Why REIT ETFs?

Being a landlord is harder than people imagine. It’s not as simple as collecting a juicy rent paycheque every month. As a landlord, you’re liable for collecting rents, making repairs, paying property taxes, and dealing with tenant issues. It can quickly balloon into a full-time job as opposed to a passive income stream.

With a REIT, all you need to do is sit back and collect the monthly distributions. Unlike rent income, income from REITs can potentially be tax-free if you hold them in a TFSA. Unlike with real property, you can invest as much as you like without needing to take out a mortgage.

My favorite REIT ETFs

The Canadian ETF industry has a variety of ETFs available, so it’s important to shop around and compare your options. A great beginner pick is the Vanguard FTSE Canadian Capped REIT Index ETF (TSX:VRE), which holds 19 REITs and real estate service companies.

VRE is the lowest cost option with a management expense ratio of 0.38%. Right now, it has a 12-month trailing yield of 3.78%. Still, some investors might not like how it doesn’t offer pure-play REIT exposure given that it also holds real estate service companies.

An alternative here is the iShares S&P/TSX Capped REIT Index ETF (TSX:XRE), which only holds 18 REITs and no real estate service companies. XRE currently has a higher 12-month trailing yield of 3.93%, but costs a higher MER of 0.61%.

Some investors might not like how XRE and VRE are highly concentrated in their top five holdings. This is a result of both ETFs being market-cap weighted. An alternative for those seeking higher diversification is the BMO Equal Weight REITs Index ETF (TSX:ZRE), which holds 24 different REITs in equal allocations.

The Foolish Takeaway

Regardless of your ultimate choice, any of the three REIT ETFs could be a great way of adding real estate exposure to your passive income stream. The ultimate choice should boil down to your investment objectives. Personally, I think VRE is best for those desiring the lowest fees, XRE for those seeking pure REIT exposure, and ZRE for those who want greater balance and diversification.

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 Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Stocks for Beginners

Plane on runway, aircraft
Stocks for Beginners

Up 53% From its 52-Week Low, Is Cargojet Stock Still a Buy?

Cargojet (TSX:CJT) stock is up a whopping 53%, nearing closer to 52-week highs from 52-week lows, so what's next for…

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Stocks for Beginners

3 TFSA Hacks That Could Make You a Millionaire

Do you want a $1 million without worrying about the tax bill? These TFSA hacks could help you become a…

Read more »

Early retirement handwritten in a note
Stocks for Beginners

These 2 TSX Growth Stocks Could Help You Retire Early

Buying these two TSX growth stocks can help you retire early by multiplying hard-earned savings in the long run.

Read more »

Technology
Stocks for Beginners

The Best Stocks to Invest $1,000 in Right Now

Want a great starter portfolio? Here’s a list of the best stocks to invest $1,000 in right now for long-term…

Read more »