Dale Jackson

Personal Finance Columnist, Payback Time

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A growing number of Canadians are becoming landlords. 

New data from consumer credit reporting firm, Equifax Canada Inc. shows the fastest growth in the red-hot housing market comes from current homeowners purchasing additional properties. 

And it’s not just secondary properties like cottages or chalets. Equifax says the number of people adding a fourth mortgage or more jumped 7.7 per cent, more than doubling the increase for first-time borrowers. 

Rising home prices and low mortgage rates have made it easier for homeowners to leverage the equity in their existing properties to generate income from rents and reap capital gains when it is sold. But many might not fully grasp the risks and hassles of being a landlord and could find a safer, more convenient alternative in real estate investment trusts (REITs).
 

HASSLE FREE

Most smaller landlords know the burden of having to deal with faulty plumbing in the middle of the night but it’s just the tip of the iceberg when it comes to legal liabilities and endless government regulation; not the mention the nightmare of having to deal with the tenants from hell.

All that becomes the REIT manager’s problem. REITs are publicly traded companies that own or finance income-producing real estate. Administration and maintenance are part of the operating budget. 

Like any real estate, REIT prices can fluctuate but income investors are rewarded with steady dividend payouts far superior than anything the bond market can offer.

Annual yields from some of the larger REITs can top five per cent.
 

DIVERSIFICATION

Unlike individual real estate holdings confined to one sector in one geographic region, REITs can have many real estate holdings diversified by sub-sectors including residential, commercial and industrial. 

There’s no limit to how diversified a REIT can be. InterRent REIT and Killam Apartment REIT, as examples, hold multi-unit residential properties across Canada. BTB REIT holds commercial, office and industrial properties concentrated in Quebec. RioCan and Smart REITs hold traditional bricks and mortar retail businesses.

Investors can also hedge risk by offsetting sub-sectors against each other as the real estate landscape changes. Bricks and mortar REITs, for example, have been hit hard by the double-whammy of the pandemic lockdown and the ongoing trend toward e-commerce. At the same time, the move toward e-commerce has increased demand for REITs that hold industrial properties specializing in warehousing, logistics and distribution.      

Other REITs capitalize on shifting demographics by investing in seniors housing as the influx of baby boomers ages.

If that’s not enough diversification you can hold all the major REITs listed in Canada through the iShares S&P/TSX Capped REIT exchange traded fund, which charges an annual fee of 0.55 per cent of the amount invested.

For those counting on their principal residences for retirement income, determining how much, and which real estate sub-sectors belong in their portfolios is further complicated when factoring how their residential real estate holding fits into the mix. A qualified financial advisor with a view of the big picture could be a big help.
 

TAX ADVANTAGES

While capital gains on the sale of a principal residence are not taxed, half of capital gains on secondary properties are taxed; just like most other equity investments. One tax advantage a REIT has over a secondary property is its ability to avoid taxation all together if it is held in a tax free savings account (TFSA). 

Contributions to a REIT in a registered retirement savings plan (RRSP) can also be deducted from taxable income and taxation deferred until it is withdrawn.

Those tax advantages can be multiplied by homeowners who leverage the equity in their principal residences through a home equity loan to make large investments in REITs, just as they would tap into their home to buy another property