There’s a lot of talk about inflation and interest rates lately. Prospective new investors can forget surging interest rates! Interest rates are also having an impact on the home market, making buying more expensive. This has put the brakes on armchair landlords everywhere that were looking to buy a rental property.
There is a way to generate a solid rental income stream without owning and maintaining a property.
Interest rates are rising, which is good and not so good After what seems like an eternity of rock-bottom interest rates, the amount that lenders charge is now creeping upwards. In fact, the Bank of Canada bumped the key rate by 50 points just last week — the second consecutive increase. Welcome the world of surging interest rates!
If that weren’t bad enough, there will be additional hikes in the weeks and months ahead. All these hikes are tasked with bringing inflation back down to a 2% target. That’s a tall order considering everything from gas to food and other necessities has spiked this year well into double digits. In fact, the CPI has spiked across the board, with food and shelter registering a whopping 10% increase in April.
That’s the largest increase in inflation since 1981. Let that sink in for a moment, while you forget surging interest rates.
Those rising interest rates will also indirectly impact home sales, eventually driving down prices. Home affordability across Canada’s major metro areas is currently in the stratosphere. The average price of a home in the Toronto area is still well over a cool million, despite a slight drop registered in the last month.
This means that prospective rental property owners and new home buyers are still on the hook for a massive down payment. If anything, they now have to deal with increased borrowing costs as well.
Fortunately, there is another alternative.
Meet RioCan RioCan (TSX:REI.UN) is one of the largest REITs in Canada. In total, the company boasts a massive portfolio of over 200 properties focused on Canada’s major metro areas. RioCan also has projects in the development pipeline consisting of over 42 million square feet.
Most of RioCan’s developments are retail-focused, but that allocation shifting towards mixed-use residential properties. That shift is where a massive long-term opportunity is emerging that caters to the affordability and supply problem outlined above.
RioCan’s mixed-use properties are located in high-demand major metro areas that are built along transit corridors. The residential units are situated atop several floors of retail, making them appealing to commuters and shoppers alike. More importantly, the surging demand for those units translates into a solid revenue stream for RioCan and, by extension, a juicy dividend.
That dividend, which is paid out on a monthly cadence like a landlord’s rent, currently works out to a yield of 4.52%. Putting those potential earnings into context, a $60,000 investment (which is still far less than the recommended down payment), will earn an income of $226 each month.
Prospective investors (and would-be landlords) should keep two important factors in mind.
First, when compared to a rental property, the risk is far smaller. There’s no upfront down payment, mortgage, or property taxes to be worried about. You also don’t need to worry about finding and keeping tenants. Again, forget surging interest rates!
Second, let’s not forget about reinvestments. If you don’t need to draw on that income yet, don’t! Instead, opting to reinvest that income until the point you need it will ensure that your prospective income is far greater.
In other words, you can forget about surging interest rates and just sit back and generate a healthy (growing) income stream.
Forget surging interest rates No stock is without some risk, and that includes RioCan. Fortunately, that risk is lower than the alternative of putting up well over $200,000 towards a home down payment.
In my opinion, RioCan remains a great long-term option that’s suitable for any well-diversified portfolio.
The post Armchair Landlords: Forget Surging Interest Rates appeared first on The Motley Fool Canada.
Fool contributor Demetris Afxentiou has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.