Why REITs are a must for your TFSA account

UNLOCKING TAX EXEMPT INCOME EVERY YEAR

Real Estate Investment Trusts or REITs are companies that own or finance income-producing real estate across a broad range of sectors.

Adding REITs to your TFSA in 2021 will offer you:

Low effort access to the Canadian Real Estate Market

Equity REITs provide you with opportunity to invest in the Canadian Real Estate Market without the trouble of going through all the different actors and stages of actual real estate investment.

There is no need for an initial capital outlay in the form of a down-payment, no need to personally manage tenants or bear responsibility of maintaining the property. In short; there are significantly less head-aches.

Equity REITs can also allow you to invest in a specific segment of Real Estate that would be significantly harder to break into otherwise, such as sector specific REITs that specialize in commercial properties, industrial properties, and even data centers.

By owning a share in an equity REIT that specializes in one of these segments, you own a right to the income generated by the assets under that REIT.

High Liquidity

REITs are traded on public exchanges, you can buy or sell REITs with the click of a button when markets are open.

Real Estate on the other hand is an arduous process that requires a lot more time and effort.

In real estate there are a lot more factors that can affect the transaction process; with many intermediaries involved.

Natural Inflation Hedge

Landlords depending on the terms of their leases can generally increase their rent in line with inflation.

This ability to pass on operating cost inflation to the tenant make REITs a natural inflation hedge, however, as with other natural inflation hedges such as gold, there is some lag.

During these pressing times of vast fiscal and monetary stimulus, where the money supply (M2) has increased in Canada year-over-year by 18.1% as of September 2020; there is no asset I would rather hold during these current circumstances than one that is able to fend off inflationary pressures. REITs also have the added benefit of exploiting current monetary policies to refinance their existing debt at more favourable terms.

Canadian M2 Money Supply:  2016 to September 2020 ($CAD mn)

Current High Yield with Space for Capital Gains

As of today a lot of REITs are trading at a vast discount to their pre-pandemic days, according to MSCI Canada Real Estate Index, Canadian REITs have plummeted -35.97% between September 30th 2019 and September 30th 2020.

REITs provide stable consistent cashflow due to the structure of their lease agreements, which makes them much less volatile than many growth stock, however, the massive discount on some of these REITs provide ample opportunity for capital gains.

Some REITs have not been drastically affected at an Adjusted Funds From Operations (FFO) per share basis, but are seen trading at discounted prices of more than 30% compared to a year ago.

These discounted REITs provide us with ample opportunites that have not been seen in a very long time.

Some of the largest Canadian REITs such as RioCan and SmartCentres are trading with a yield of more than 9%.

That is if a REIT is on the market for $100, then the annual distributions received is $9.

These distributions if placed in a Tax free account such as TFSA, RRSP/RRIF or RESP will result non-taxable income, however, if your REIT investment is in a non-registered account then your distributions will be taxed at your income level.

Keep in mind that a REIT's yield is only attractive if it is sustainable; any cut or suspension to the payout will greatly affect its price.

I recommend looking for REITs with low levels of debt and low dividend to funds from operations ratio for the last trailing twelve months.

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