3 Common Ways For Anyone To Invest In Real Estate
Purchasing property has become a popular method of both holding and building wealth in Canada. Whilst real estate investing could merely be seen as heightened interest triggered by media coverage in recent years, in truth real estate investing is not new—billionaire Andrew Carnegie famously said many years ago that 90% of millionaires acquired their wealth by investing in real estate.
Let’s explore some common real estate investing methods, including some newer investment vehicles enabling anyone to invest in real estate.
Real Estate Investing
When you think about real estate, the first thing that comes to mind is probably your home. However, real estate investing typically does not mean that you are purchasing a home to live in. It also does not always mean that you have to be a landlord. There are many ways to invest in real estate—here are 3 common methods.
Buy A Property And Rent It (Or Parts Of It)
You can buy a property and rent it out, or live in it and rent out a part of the home (such as a room or a basement) to make rental income. The two primary ways this can make you money is through 1) rental income and 2) appreciation—if your property appreciates, you can make a profit from selling it.
If you take this approach, this is a hands-on investment. You become a landlord responsible for day-to-day, month-to-month, and year-to-year operations such as paying the mortgage, property taxes, and insurance, collecting rents, finding tenants, and dealing with that potential leaking sink pipe as well.
Buy A Property, Upgrade It, And Sell It (Flipping)
You can buy a property and upgrade it, enabling you to potentially sell it for a profit. As opposed to the longer term investment of buying a property and renting it out, “flipping” a property is generally done quickly with the intention of selling the finished property as soon as possible to earn the greatest profit. This profit can come not only from realizing the value of the repairs and updates made to the property, but also from holding and reselling the property in an advantageous market.
If you take this approach, it is important to note that while real estate tends to appreciate in hot markets, thereby increasing the possibility of making a profit through purchasing and flipping an undervalued home, there are no guarantees. You will need to employ careful budgeting, decision making and delegation to ensure the repairs and upgrades you make do actually increase the value of the property enough to be profitable. More importantly, if you buy the property with the help of a mortgage, you may run into trouble making the mortgage payments if you are unable to sell the property quickly.
Invest In Real Estate Investment Trusts (REITs)
If you don’t wish to invest an enormous amount of time and effort managing properties yourself, but still want to invest in real estate to diversify your wealth holdings, you can hire someone to handle these tasks or you can invest in Real Estate Investment Trusts (REITs). REITs are real estate companies that own and/or operate income-producing properties and are required to distribute their taxable income to unitholders.
If you take this approach, you will be employing the most hands-off method of investing in real estate. Furthermore, there is a much lower cost of entry (you don’t have to invest the price of a property in REIT units but can invest a much smaller amount) and also higher liquidity than purchasing a property (REIT units are usually listed on stock exchanges and can be easily bought and sold—hopefully for a profit). As for income, you will generally receive healthy monthly or quarterly distributions which are taxed at a more favorable tax rate than rental income.
Investment Alternatives To Real Estate Which Still Provide You With Income
Canadians have a love affair with investing in real estate, but this is only one way to generate an additional income stream to build your wealth—millionaires, on average, possess seven income streams. Diversifying your investment portfolio and investing in dividend paying stocks and income trusts, including REITs, are investment alternatives to real estate and can provide a reliable stream of income.
The Bottom Line
Different forms of investing come with different levels of both risk and potential returns. But don’t worry if you are daunted by the task of choosing the investments which best fit your risk tolerance and return expectations: that’s what investment professionals are for. Bloom specializes in customized investment portfolios for high-net-worth individuals to generate income producing portfolios, tailored to their specific needs such as having a steady stream of income in retirement, funding philanthropic ambitions or generating independent cash flow.
For sophisticated private clients, Bloom Investment Counsel, Inc. can help you with your unique needs, such as “how do I best divide my wealth between real estate, stocks, cash and cash equivalents, and other forms of investments?” or “how can I preserve and grow my wealth so that my children can receive more of my estate?”
Our long-standing private clients speak to our commitment and ability to protect and build their wealth throughout the test of time.
Are you ready to meet your more complex financial objectives? Get in touch with Bloom.
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.