Real estate is a traditional way to generate passive income. Investors no longer need to take on a lot of debt or purchase individual properties to earn income from real estate.
Nowadays, it’s as easy as ever for anyone to become passive landlords by investing in real estate investment trusts (REITs). REITs have professional management to take care of a diversified portfolio of real estate assets, including mortgages.
You can immediately generate what’s similar to rental income passively by simply buying units of REIT ETFs. Investopedia introduced three top Canadian REIT ETFs. I’ve ordered the REIT ETFs based on their net asset values from large to small. Let’s explore to see if they could be good purchases for real estate income.
A large Canadian REIT ETF
iShares S&P/TSX Capped REIT Index ETF (TSX:XRE) has a recent net asset value (NAV) of $1.4 billion. Based on its most recent monthly cash distribution, its annualized yield is 2.2%. Its management expense ratio (MER) is 0.61%. It consists of 20 Canadian REITs across retail, residential, office, and industrial.
As shown below, XRE ETF’s top five holdings make up about 49% of the ETF.
This ETF provides a yield that roughly matches with the long-term rate of inflation. To many income investors, XRE’s 2.2% yield is not high enough.
This Canadian REIT ETF provides more income
BMO Equal Weight REITs Index ETF (TSX:ZRE) is a better option for more income today. Its annualized yield is 4% based on its most recent monthly cash distribution.
The Canadian REIT ETF has a recent NAV of $775 million. Its MER of 0.61% is the same as XRE’s. It consists of 22 Canadian REITs. ZRE ETF’s top 10 holdings are as follows, making up approximately 48% of the ETF.
A low-fee Canadian REIT ETF
Compared to XRE and ZRE, FTSE Canadian Capped REIT Index ETF (TSX:VRE) is a low-fee ETF with a MER of 0.38%. This is about 38% cheaper. VRE ETF yields about 3.6%, and its top five holdings make up about 54% of the ETF.
The real estate sector has recovered roughly inline with the market from the bottom of the pandemic market crash. The general REIT sector is on the pricey side.
XIU data by YCharts
If you are interested in investing in one of the Canadian REIT ETFs for income, consider buying ZRE or VRE over XRE for more income. At this current point, it would be prudent to wait to buy on dips.
Alternatively, you could go through REIT stocks individually to seek value and a bigger margin of safety for your investable capital.
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Disclosure: As of writing, we don’t have a position in any of the stocks or ETFs mentioned in this article .
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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