How to Make $ 200 a Month Passive Income Tax Free in Your TFSA
Some investors buy properties for rent to earn monthly income. However, this is a lot of money invested in real estate and landlords will have to pay off big mortgages. Moreover, it is not exactly passive income. Landlords need to maintain the property and meet the needs of the tenants.
Why not limit your real estate investments and diversify your capital for growth? Here’s how you can relax and make $ 200 a month without paying passive income tax in your Tax Free Savings Account (TFSA). The pandemic market crash has provided opportunities to buy quality real estate investment funds (REITs) at a good price.
H&R REIT (TSX: HR.UN) invests approximately 470 real estate properties in Canada and the United States. It has a diversified portfolio covering office (45% lease), retail (33%), residential (16%) and industrial (6%) real estate.
Its shares are about 33% lower than at the beginning of 2020, before the pandemic market crash, with about 69% of its portfolio in retail and office real estate. The fair value of these properties declined significantly in the past year (mainly in the first quarter of 2020) due to a difficult retail environment and instability in the energy sector, which has raised concerns about office real estate among tenants in the energy sector.
However, H&R REIT’s rental collection has been robust. In 2020, the REIT reported cash from operations (FFO) per unit of $ 1.67, just 5% less than last year. Based on a more conservative adjusted FFO (AFFO) of $ 1.27 per unit, the payout ratio was 54%. Typically, the payout ratio is in the 70% range. So there is a large buffer to protect the distribution of funds. In January 2021, rent collection was 94%, which is quite a lot.
At the time of writing, the H&R REIT yield is 5.17%. You can invest around $ 46,422 to make $ 200 per month from REIT.
Get passive + 7% tax on dividends
SmartCentres REIT (TSX: SRU.UN) is another REIT that investors can use to generate passive monthly income on their TFSA. Even in the absence of government assistance programs, the retail REIT still managed to collect gross rents between 93.4% and 95.1% between October and December 2020.
SmartCentres REIT has an industry-leading occupancy rate of approximately 97.4% of its 166 properties in Canada. Walmart serves as an anchor for 73% of its property. He is also the largest REIT tenant, generating over 25% of its revenues.
About 60% of SmartCentres REIT tenants were core services, which remained open from March to June 2020. In addition, 98% of the company’s revenues come from open-air malls that opened shortly after the economic lockdown and were more convenient for shopping during the pandemic.
REIT has shown solid results in 2020. Its net operating income and funds from operations (FFO) increased marginally from 2019. FFO per unit fell only 0.47%, bringing the FFO payout ratio to 86.6%. SmartCentres REITs are a rare breed that have retained their cash flow during the pandemic. The current yield is 7.17%. You can invest around $ 33,473 to make $ 200 a month from REIT.
To get $ 200 per month of tax-free income between two REITs, you can invest about $ 39,948 each in your TFSA. REITs are much more diversified investments than individual real estate. Plus, they are run by professional teams that take care of properties, tenants and mortgages so you can sit back and relax.