Monday, 25 April 2016

Buying real estate for investment purposes? Consider Riocan as an alternative.

Most people have heard the situation of buying a second property, either residential or commercial and renting it out to make money.  That investment setup is great for most individuals or investors.  You buy a property, you receive rent, you sell the property when it goes up in value at a future date.  This setup sounds really great, what is left out is the maintenance cost or time cost of having this setup.  Example, if you buy a second house and rent it out, you are the landlord.  You must still continue to pay property taxes and utilities.  Of course with the rent payments, you expect to come out ahead.  Most times you do but it is not effortless.  When the toliets get clogged or the roof leaks, or when the water pipes burst, you are expected to repair these in a timely manner and that can get expensive both in dollars and time.  This sudden repair could happen at 2:00 am, you would need to go and investigate when the phone call comes in.


Now I present an alternative option that might appeal to some, might not appeal to others.  If you a buying real estate for investment purposes, why not buy a R.E.I.T.  which stands for Real Estate Investment Trust.  A REIT is a company that owns, and in most cases operates, income producing real estate.  Depending on the REIT, they can own many types of real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centres, hotels and even timberlands.


The REIT I am going to showcase will be Riocan.  They are Canada's largest real estate investment trust with approximately $15 Billion as of December 31, 2015 in their portfolio.  It owns and manages Canada's largest portfolio of shopping centres and ownership interests in a portfolio of 305 retail properties, including 15 under development. Riocan's purpose is to deliver  to it's unit holders stable and reliable cash distributions that will increase over the long term.


Let's assume you want to buy a $400,000 2 bedroom condo for investment purposes.  Now for argument sake, let's assume you have the $400,000 in cash and you can buy the condo outright.  You advertise, you interview tenants, you settle on $1,700 monthly as rent.  Now that sounds great but you still need to pay maintenance fees, property taxes, and utilities unless you negotiated the rent to include that, but let's say you pay them.  Now a realistic number after all this would probably be about $1,000 which is what you make as a landlord.

Now if you use that same $400,000 and buy Riocan Shares.  It would look like this.  As of April 22, 2016, the price of Riocan shares is $26.78 per unit, which means you could buy about 14,900 shares and their distribution is $0.118 per unit which is a dividend yield of about 5.28%, not bad considering the cost of living is about 2.5%.  You buy the shares, you will now get $1,758.20 in monthly income.  The calculation is 14,900 shares times 0.118, now for situation, I would not recommend a DRIP as you want the income.  You will be taxed on this but Riocan qualifies for the divined tax credit so you will get benefits there.  This also needs to be bought in a non-registered brokerage account.

Now the price of Riocan shares will change but if you look back at the history of the price, it is pretty stable.  I know, they always say that past performance does not indicate future results but Riocan has a low beta.  Beta means volatility and Riocan is low.  The distribution is monthly so that is a plus.


Now you may have heard the argument about putting all your eggs in one basket if you do the Riocan purchase but if you buy a condo for rent, is that that not the same thing, putting all your eggs into the condo?  It's how people view investments, I can understand with the crash of 2008 and 2009 that people are wary of the stock market but in the long term, stocks will benefit you the most.

If you do not want to buy $400,000 of Riocan, you can buy $200,000 and another $200,000 on another REIT, they all have high dividend yields and who wouldn't want to be a landlord for shopping plazas and say Hotels.

Next time you drive past a shopping plaza, take a quick look at the signs that show you what stores are located there.  At the bottom, you will see Managed and Operated by RIOCAN.  You will be surprised as to how many plazas that you pass by every day and did not know it was a Riocan property.

Link to RIOCAN

Here is the link to their website, you can see the address of the properties listed in your area.

Consider this alternative to real estate investment.

Please leave your thoughts and comments.

Disclosure, I own enough shares of Riocan to qualify for a 1 share DRIP.

Monday, 4 April 2016

Become a TFSA millionaire

When i was younger, I always dreamed of being a millionaire.  Sounds rich doesn't it?  A million dollars is not what it used to be.  It is still a lot of money and you can retire comfortably with that amount.  But how do you get there without winning the lottery.

Before the TFSA (Tax Free Savings Account ) was created, the knock out champion of savings was the RRSP.  Basically a tax deferring setup by the government to encourage saving money for retirement.  The intention was great but deferring meant paying it back at the end.  Everything is rosy when you get those refund cheques for years and years on end but when it comes time to take it out, the tax man is waiting and wait they will.

Along comes the TFSA, all gains, dividends, interest is tax free.  Now the merits of the TFSA vs the RRSP debate will continue.  But I would like to add some thought to it.  RRSP is great for tax deferring but isn't the TFSA better as it is no tax forever?  Yes the TFSA limit is small currently as of 2016 the limit is $46,500.  But here is some thought as to how to become a TFSA millionaire for younger investors.

As long as you max out the $5,500 limit each year and invest in stocks that are able to deliver a decent return over the next few decades, they're almost guaranteed to turn their TFSAs into million dollar accounts by the time they are ready to retire.  Its hard to pick stocks that can stick around for decades, any one of situations can come up to ruin a stock.

A really good example is Kodak in the 1980s.  It dominated the photography industry.  If you bought film, it was a good chance it would be Kodak.  It had a huge presence in photography and cameras.

We all know what happened next.  Kodak did not recognize digital photography.  Shares peaked at $100 each in 1987 and 25 years later, they were worthless.


Now fast forward to Canada in 2016.  BCE or Bell Canada Enterprises looks to be a Kodak clone.  BCE is Canada's largest telecommunications provider and dominates the industry, providing the systems needed for data hungry consumers to get their fix.  With more and more of our lives centring around the internet both at home and on the go, its hard to see anything but continued demand for the company's services.  It's hard to see what happened to Kodak happen to BCE.


Say you were a 25 year old looking to save for retirement.  To retire at a conventional age, you'd have a 40 year investing period.

Over the last 15 years - including reinvested dividends but excluding brokerage commissions, BCE has gone up 7.6% annually.  This is including the crash of 2008-2009.  As you can see this is not a high flying stock.  Just a solid blue chip stock delivering good performances.  BCE also raises its dividend at least once a year.  Setting up a DRIP for 40 years would be beneficial to yourself.  The magic of compounding working on your side.

If an investor put $5,500 annually into a TFSA and BCE were able to replicate the returns from the last 15 years, it would take 32 years to become a millionaire.  Assuming a start date at age 25, this investor would be worth seven figures by their 57th birthday.  All tax free!

It isn't really hard to get rich slowly.  All investors need to do is to be patient, have a good savings rate, reinvest dividends, and choose good stocks.  The rest will take of itself.


Now I know what you are thinking.  That classic disclaimer, something along the lines that past performances do not always reflect future returns.  With my points above, anything could happen but there are worse places to put $5,500 a year.  BCE delivers a great dividend yield.  There are no MERs to pay for 40 years.   Heck I got the idea BCE was blue chip simply by looking at the top 10 holdings in most top mutual funds, if it's good enough for a mutual fund, its good enough for me.

As always, do your due diligence in investing your own money.

DISCLAIMER : I own BCE shares, enough for 2 shares every time the dividend DRIPs