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.

REIT

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.

RIOCAN

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.

TO THE NUMBERS

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.

FINAL THOUGHTS

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.