Investing in Canada’s Real Estate Market
Mark Twain once said “Buy land. They don’t make it anymore.”
Real estate has long been considered its own asset class within a well-diversified portfolio. The combination of income, tax efficiencies, and capital appreciation, along with the benefits of diversification, should make real estate a consideration for your investment portfolio.
However, there could also be risks to think about, such as a real estate market downturn, and dependent on the investment approach you take, managing and maintaining real estate can be labour intensive and sometimes costly. Your decision to invest in real estate will be dependent on your own risk tolerance, time horizon, and investment goals.
Ways to Invest in Real Estate
In Canada, there are many different ways to invest in real estate. Some are considered active, such as owning your principal residence, owning a rental property, or buying land or a house and flipping it. Others are passive, including REITS, RELPS, and mortgages.
Purchase a Principal Residence
The most common method of real estate investing is purchasing a home to live in. You are not only buying a place to live, but you are making a long-term investment. You are paying your own mortgage and therefore growing your own net worth. With each mortgage payment, you are decreasing your debt and increasing your equity value.
House Flipping
House flipping is not for the inexperienced. It involves buying a property that you determine to be undervalued with the potential for improvement at a reasonable cost. You make the necessary improvements and then sell the property, hopefully at a profit to what you paid plus the renovation expenses. You need to be capable of property value assessment and knowledgeable about renovation requirements and expenses.
Purchase a Rental Property
Following principal home ownership, purchasing a residential rental property is the next most common way to invest in real estate. The property provides rental income which hopefully covers the majority of mortgage payments, property taxes, and insurance. As the owner, you will be responsible for ongoing maintenance and any tenant issues. If you do not want to be an active landlord you can hire a property manager, but that will add to expenses.
Short-Term Rental Platforms – Airbnb
In the past few years, rental platforms such as Airbnb have enabled people to rent out their homes or rooms within their homes for short-term or long-term stays through a website app. There are regulations you may have to adhere to, dependent on where your property is located.
Real Estate Investment Trusts (REITs) and REIT ETFs
A REIT is a real estate company that owns and manages numerous income-producing commercial properties such as office buildings, commercial spaces, industrial complexes, hotels, etc. Investors can purchase units of the REIT on a public exchange much like they would shares in a public company. The REIT pays out income like a dividend-paying stock. REITs provide liquid investment in a diversified portfolio of income-producing properties.
REIT ETFs provide even greater diversification as REIT ETFs will hold a number of REITs within a single public exchange trading entity.
Real Estate Limited Partnerships (RELPs)
RELPs invest in a diversified portfolio of existing or developing properties on a contractual basis for a group of investors. The RELP can buy, lease, develop, and sell properties. There is usually a prespecified term for investors such as 7 to 12 years. They do not trade on public markets and are more like private equity investments. They typically require a minimum commitment of at least $100,000, and sometimes upwards of several million dollars.
Private Mortgage Lending
Private mortgage lending is a higher risk, potentially higher-income alternative to direct real estate investing. This is most efficiently done by pooling your funds through a private mortgage company. As the mortgages are for higher-risk real estate purchasers the mortgage company is better able to assess the purchaser’s credit risk and applicable mortgage rate.
Is Real Estate Investing for You?
Real estate investing has many benefits including, investment portfolio diversification, specific tax breaks, capital appreciation, and additional income streams.
Real estate investing also comes with additional risks that could lead to significant losses. These can include interest rate risk relative to mortgage rates, government policy changes in specific real estate sectors, illiquidity, and others.
It is crucial to obtain the guidance of a real estate professional along with the input of a financial professional to decide the appropriate real estate investment approach for you.
Invest with Bloom Investment Counsel, Inc.
At Bloom Investment Counsel, we are dedicated to providing diversified and customized actively managed Canadian and U.S. income-producing portfolios, including REITs, to generate a total return through capital appreciation and a steady stream of income for our clients. For more information on how we can help you with wealth planning, call us at +1-416-861-9941 or email us at info@bloominvestmentcounsel.com.
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.