Real estate investment trusts (REITs) are an excellent place to get exposure to passive income but without the pain of owning and managing the real estate itself. If any Fools have ever been a landlord, they’ll know that it is far from “passive” investing.
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Buying an investment property is full of pitfalls
Firstly, real estate as an investment requires a significant amount of capital. Both residential and commercial real estate prices have drastically risen in the past five to 10 years. Any piece of real estate requires a large equity commitment.
Secondly, purchasing and selling real estate is costly. There are significant upfront fees required, like appraisals, engineering reports, loan fees, legal fees, and, depending on where you live, taxes.
This is just the purchase/sale process. It doesn’t even factor in the tonnes of time, energy, and expense involved in managing a property.
REITs make real estate investing easier
REITs are a very attractive alternative to owning the actual asset. With a publicly listed REIT, you can buy and sell whenever the stock market is open. Your fees are the cost of a commission (so $7-10). You have zero management responsibility.
In many cases, you get an institutional quality management platform. Likewise, you get to own a piece of some of the best quality properties in the world. Given their size and scale, REITs can finance and purchase properties that most investors could never afford on their own.
Lastly, both the passive income and capital returns could potentially be better than owning the asset yourself. Why? Elevated rates have bid down the valuation of public REITs — so much so that you can buy a REIT at a major discount to its private market value. You get to prosper on that arbitrage opportunity over the long term (and collect income while you wait).
If you are looking for some ideas in the REIT space, here are a couple of favourites.
Dream Industrial: A top industrial real estate stock
Dream Industrial REIT (TSX: DIR.UN) owns and manages over 70 million square feet of industrial real estate across Canada, the United States, and Europe. Dream has built out a very good portfolio of high-quality, well-located properties.
Dream’s properties are in top markets around Canada and Europe. It has been enjoying strong rental rate growth and high single-digit funds from operation (FFO) per unit growth. The average portfolio rental rate is 30% below market rates. This should support strong organic growth for years ahead.
Right now, this REIT yields 5.3%. It pays a nice monthly distribution. It also trades at a big discount to its net asset value, so it is a good bargain here.
Minto: A top apartment REIT
Another REIT that looks attractive is Minto Apartment REIT (TSX: MI.UN). Minto has one of the highest-quality portfolios of residential apartments in Canada.
Its properties are in top locations in Toronto, Ottawa, Montreal, and Calgary. Through its partnership with Minto Group, it also has some prime developments coming online soon in Vancouver and Victoria.
Minto was in a tough spot due to elevated variable debt. It has a new management team that has divested assets to rightside its balance sheet. Its chief executive officer is focused on smart capital allocation and delivering strong FFO-per-unit growth.
This REIT yields 3.25% today. Demand for residential real estate should be elevated for decades ahead, and Minto is exceptionally positioned.
