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Email this11:47 am
August 9, 2014
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As I don't really want to manage all the repair of the house or apartment myself and want to have the flexibility to move around, I just want to ask a hypothetical situation of comparing the outcome of using the money I get from selling my house to buy REIT and use the REIT's "dividend" (it have a official name, but I forgot about it) to pay rent verses keeping my house.
I think this may be a good question for some of you here as you already pay off your mortgage and may want to move around every 4/5 years in your retirement life so you can experience different part of the country.
1:46 pm
October 27, 2013
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If you did that, one should own one of the Apartment (rental residential) REITs to offset rent requirements. Using Boardwalk (BEI.UN) as an example, its yield is about 3% BT or perhaps 2.5% after tax depending on distribution mix and one's tax rate. To pay rent of $1500/mo, one would need to have about $720,000 invested to make it a wash.
Using Milestone REIT (MST.UN), its yield is about 5.5% (or about 4.5% AT). One would need about $400,000 invested. Canadian Apartment Properties (CAR.UN) has about a 4.8% yield.
With that kind of exposure, one would likely need to be in a mix of about 4 REITs to spread the risk. The downside would be risk of a distribution cut in the event of a substantial interest rate increase. REITs are generally interest rate sensitive to some degree.
List of wholly, or partially, residential REITs:
Boardwalk REIT (TSX: BEI.UN)
CAP REIT (TSX: CAR.UN)
InterRent REIT (TSX: IIP.UN)
Milestone Apartments REIT (TSX: MST.UN)
Morguard North American Residential (TSX: MRG.UN)
Pure Multi-Family REIT LP (TSX: RUF.UN)
True North Apartment REIT (TSX: TN.UN)
Added later: If I was doing this, I would not use REITs exclusively to back rental needs. I would more likely use a mix of 1/3rd REITs, 1/3rd preferred shares, 1/3rd high dividend ETF for diversification. The aggregate yield could/should be enough to accomplish the same thing with about $500k in capital (have not done the math).
4:03 pm
November 4, 2014
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Jon, actually my cousin did a similar thing with his primary residence. Unfortunately, his wife passed away prematurely at 39 in 2010.
Their primary residence was not fully paid off but was worth $550,000 and he had $450,000 of equity after they were paying the mortgage for 16 years. They had no mortgage insurance but had each $150,000 life insurance policies through their workplace.
The bottom line was that he had sold the house as they had only 1 daughter and the house was too large with 3 bedrooms. He basically had $566,000 in total proceeds to invest as they went to rent a house that was owned by one of his brothers-in-law.
It was $1,150 a month+utilities, so it is around $1,250+ utilities a month total rent these days. My a cousin bought 3 REIT's, 2 Canada and 5 provincial bonds and 3 GIC's. It is making a 5.16% current yield as 80% are in longer term bonds at an average 4.759%.
This is bringing in $29,206 a year in 2014 in 4.5 years since 2010, it has brought in total $132,551 in total interest and REIT income. This is all income and no return of capital.
All his bonds, REIT's are all at higher market values ranging from 14% to 21% over the par value, principal except GIC's are at par.
The good news is that he has started transferring some of these bonds, REIT's, GIC's etc. to his TFSA's so some income is coming in income tax free, about 6% of all income which is $1,757 a year.
He will do some in kind transfers in his RRSP as well because he has $25,000 of unused contribution room growing every year. One thing he made sure is taking some of their savings with a conservative approach of having $15,000 in saving account or liquid GIC's and $45,000 in laddering GIC's 18 months to 5 years.
This is to protect him and his daughter from any major expense and other costs during the year plus so he does not need to sell his bonds, REIT's and lose future income.
I wish we could get GIC and bond rates like back in 2010, 3.50%, 4.75%.
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