When most people think of passive income from real estate, they think of renting out a home – maybe even running an Airbnb. While that can generate significant cash flow, it also comes with many headaches: complicated tax returns, strict local regulations, potential problems with late-night guests, cleaning coordination, and the looming risk of property damage.
But there’s a more hands-off route that still gives you real estate exposure and monthly income without having to deal with guests or cleaning services. Enter Canadian real estate investment trusts (REITs) and REIT exchange-traded funds (ETFs).
Why REITs are the simpler alternative
REITs are publicly traded companies that own and manage income-producing properties such as shopping centers, apartment buildings, warehouses or healthcare facilities. When you invest in a REIT, you get some of that income in the form of regular distributions, which are usually paid monthly.
To take Granite REIT (TSX:GRT.UN) as an example. It focuses on industrial properties, such as logistics warehouses, and has a strong track record of reliability. Granite has increased its cash distribution for fourteen years in a row, with a 4.1% growth rate over ten years. At the current price of $76.53 per unit at the time of writing, it offers a yield of 4.4%. That’s pretty decent for monthly passive income.
Analysts estimate the stock is about 16% undervalued, with an upside potential of almost 19%. Technically, the REIT appears to have price support in the $58-$62 range – so a dip into that zone could be an opportunity to lock in better returns and upside potential.
An even more passive approach: REIT ETFs
Want something even more hands-off? Consider a REIT ETF such as BMO Equal Weight REITs Index ETF (TSX:ZRE). Instead of purchasing individual REITs, ZRE gives you instant diversification across the entire Canadian REIT sector.
ZRE holds approximately $590 million in net assets and offers exposure to a broad mix of real estate segments:
- 41% in retail REITs
- 30% in multi-family homes
- 9% in diversified REITs
- 5% each in industrial, healthcare, healthcare REITs and office REITs
The fund spreads its investments evenly; no single REIT dominates the portfolio. Top positions include Chartwell Retirement Homes, Slate Grocery REIT, ReitGranite REIT, and Minto Apartment REITeach accounting for approximately 4.8 to 5.1% of the fund.
The ETF currently yields about 4.85%, with monthly payouts. While the management expense ratio (MER) of 0.61% is slightly higher than some ETFs, the returns more than cover this.
Over the past decade, ZRE has delivered an annualized return of about 7%, which lags the broader Canadian stock market’s 11.4% return – but REITs are primarily income generators. The key is buying on dips to increase both your returns and your long-term returns.
Takeaway for Investors: Stress-Free Passive Income
Airbnb may sound like an easy way to make money, but in reality it is anything but passive. Due to local bylaws, high guest turnover and wear and tear, many property owners find that the demands outweigh the rewards.
REITs, especially through a diversified ETF like ZRE, offer a truly hands-off way to generate monthly income – all without cleaning rooms or scrubbing toilets. Whether you prefer individual REITs like Granite REIT or go completely hands-off with an ETF, you can still enjoy the income benefits of real estate – minus the work involved with Airbnb.
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