Investing In Real Estate Without All the Risk

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Biography

The Rat is a young investor and entrepreneur hailing from the east coast.

After earning a Bachelor of Commerce, he returned home at the age of 21 to work in various capacities, most of which were in the private sector. There, he had the opportunity to accumulate over ten years of business experience in a range of senior management levels, take advantage of real estate opportunities, and invest in equities and other types of investment vehicles. In January 2010, he was able to retire and hence “end the rat race” in his early 30’s.

 

His site, Ending The Rat Race is a personal finance blog that has as one of its key purposes, the sharing of various personal finance topics with others having similar interests, and learning from one another.  Highly recommended!! The guy is RETIRED IN HIS EARLY THIRTIES!! (That's like my dream)

 

 

What You Should Know

 

If you knew you could consistently earn say, 7% on a real estate investment without ever having to worry about a tenant calling you in the middle of the night complaining of a leaky faucet or that their neighbors are partying too hard with loud music blaring through the walls, would that interest you?

 

Would it interest you even more to know that you would also be able to receive a monthly distribution in the process without even having to lift a finger?

 

This thread is intended to discuss how you can invest in real estate and be able to have exposure to the sector in your portfolio without all the risk. Not everybody is comfortable signing their names to buying their first home or principal residence – let alone an investment property.

 

For some, the luring effect of investment properties and how they can offer the investor ways to earn income from either renting space, ‘building and flipping’, or just simply holding until real estate prices in a particular area appreciate significantly in value, makes sense.  For many however, these are risky ventures to which they are not comfortable embarking on.

 

Furthermore, getting in on the action as it relates to investment properties is becoming increasingly difficult. As Young & Thrifty mentioned in a previous article, mortgage rules as it relates to investment properties will now require a minimum down payment of 20% starting this month.

 

This post offers an alternative to the above-mentioned risks.

 

Why Exposure To Real Estate Is Important

 

In my view, one of the most important things to have in place in relation to one’s portfolio is being properly diversified. If one sector takes a hit, because your investments are spread out in various areas, the impact isn’t too severe.  If your investments are not diversified properly, the total value of your portfolio could easily be in for shockwave before you know it.

 

For example, how many people do you know had too high of a percentage of their portfolio allocated to the Oil & Gas Sector a couple of years ago? When oil prices plummeted, and we all know they did, many investors who were over-weighted in this sector lost not only significant portfolio value, but also likely witnessed dramatic reductions in distributions. Not good.

 

From a personal standpoint, one of my long-term goals (as indicated in one of my previous posts) is to be able to further diversify my portfolio by buying into some U.S. equities. The rationale behind this is not only because the Canadian loonie is edging closer and closer to parity, or that it would allow for a sizable percentage of my portfolio to have exposure to foreign content, but equally important is that it would provide me the opportunity to diversify into new sectors.

 

For example, in Canada, there are no monster multinational corporations in the Consumer Products sector such as Coca-Cola (KO.NYSE), Proctor & Gamble (PG.NYSE), and Johnson & Johnson (JNJ). By investing in companies as such, your portfolio gets ‘enhanced’ through diversification.

 

Real Estate is no different; it offers a means to investors to get exposure to another sector if they haven’t already. If you don’t want the risk of having to sign a 25-year amortization in order to get exposure to this sector, you really don’t have to – it’s that simple.

 

How You Can Invest Your Hard-Earned Dollars

 

There are numerous ways to get exposure to real estate. The intent of my post is not to tell the reader “this is what you should invest in”. In fact, I’m the furthest thing from being a financial advisor, and everything I say should be taken with a grain of salt.

 

With that being mentioned, I think the best thing to do in relation to this post, would be to simply demonstrate what has worked for me and how I’ve been able to successfully get exposure to real estate within my portfolio without having to invest directly in investment properties.

 

Over the past years, I have purchased positions in the following companies, each of which are in the real estate sector:

 

· RioCan Real Estate Investment (REI.UN.T)

· Boardwalk REIT (BEI.UN.T)

· Crombie REIT (CRR.UN.T)

· Calloway REIT (CWT.UN.T)

· Extendicare REIT (EXE.UN.T)

· H&R Real Estate Investment Trust (HR.UN.T)

 

After logging into my non-registered accounts (where these equities are being held), I noticed that of the six companies mentioned above, five of them are in positive territory. My Extendicare position is doing the best, and is not far from a $2,000 gain; I’m happy to see this given that they had reduced their distribution a bit during the market meltdown.

 

What’s perhaps more important to note is that I held most of these stocks though the financial collapse and I am pleased to see that they all came out of relatively unscathed in a sense that they have recovered rather nicely. I can tell you, there’s nothing worse than seeing companies reduce their dividend or distribution payout, especially during a recession, so I have to say, the REITs I own did fairly well in my book – other than HR.UN.T. However, I am happy to see that my shares in H&R have appreciated in value over the past months.

 

So what can the above-mentioned companies offer the investor today? Let’s take a look in terms of dividend yield:

 

· REI.UN.T: 7.38%

· BEI.UN.T: 4.50%

· CRR.UN.T: 7.51%

· CWT.UN.T: 7.26%

· EXE.UN.T: 7.96%

· HR.UN.T: 4.27%

 

As an example, if you decided to invest $3,000 of your hard-earned dollars with say Crombie REIT (CRR.UN.T), you would earn $225.30 a year in distributions, which would amount to $18.77 per month. Of course, this excludes tax implications but it does highlight how the investor can easily get exposure to real estate without having to leverage themselves to thousands, if not hundreds of thousands of dollars with an investment property.  You can also build on creating your own cash flow stream for retirement purposes.

Y&T's side note:  If you put your REITS into TFSA's then you won't be hit with the taxation.  Also, REITS are excluded from being forced to convert into a corporation for 2011, so all the sketchiness/uncertainty at year end is avoided. =)

 

Readers, what about you? Does investing in and getting exposure to real estate in this manner interest you? Perhaps you already have invested in companies similar to those mentioned above? Maybe you prefer the more tangible aspects involved in owning a real property yourself? Regardless, I’d like to know!

 

Ending The Rat Race would like to thank Young & Thrifty in allowing for this guest post. Many thanks!  (editors note: You're welcome- Rat! Thanks for guest posting- great article!)

[Image Source: http://www.freedigitalphotos.net/images/Energy_and_Environme_g160-Bulb_Home_Idea_p11557.html Photographer: Danilo Rizutti]

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Young is a writer and former owner of Young and Thrifty and the main "twitter' behind Young and Thrifty's twitter account. She lives in Vancouver, BC and enjoys long walks on the beach, spending time with her anxious dog, and finding good deals. If you like what you read, consider signing up for email updates.

7 Comments

  1. Financial Cents on May 13, 2010 at 1:01 pm

    Once again, an excellent post Rat! Kudos to you Y&T to recruit him!

    Myself, I own REI.UN in my RRSP (amongst some index ETFs) and HR.UN in my TFSA.

    I haven’t bought Boardwalk or Calloway or others, and probably won’t for some time since I want to focus on OCPs for dividend payers in unregistered accounts.
    .-= Financial Cents



  2. young on May 16, 2010 at 4:18 am

    @Financial Cents- I concur! The Rat is awesome- he walks the talk. I have REI.UN too =)



  3. FinEngr on May 20, 2010 at 5:22 pm

    Great article Rat!

    I’ve been interested in REITs for some time, but haven’t moved on any.

    While having the hard-asset exposure to housing/rentals can be great, I like that with REITS you can look at specialized industries (i.e. malls, assisted living, apartments, etc).
    .-= FinEngr



  4. question_everything on February 13, 2011 at 8:39 pm

    What happens if RE crashes 25%.. and what about vacant commercial RE? making money on the upwards motion of the waves is easy, however, everything that goes up will always come back to earth.



  5. young on February 14, 2011 at 6:16 pm

    @question_everything- vacant commercial real estate would be difficult to make money on, that’s for sure. I think that investors who buy real estate should be prepared to whether the storm. Just like the stock market, the real estate market has highs and lows and nothing is guaranteed.



  6. Phil's Commercial Real Estate Directory on February 21, 2012 at 2:08 pm

    As someone who is relatively new to real estate investing, I found this post to be extremely helpful. What can you say about the upcoming presidential election? Will it affect the real estate market?



  7. young on February 22, 2012 at 1:37 am

    @Phil- Sorry I’m in Canada so I can’t comment 🙂



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