How do I Choose the Right Real Estate Investment Strategy?
15 July 2023 0
15 July 2023 0

Enriched Academy Staff

Traditional real estate investing for most small investors means investing in a property (home, condo, etc.) outright and becoming a landlord. Whether you choose to manage the day-to-day duties or farm them out to a property management company is up to you. Either way, you have to come up with the funds/financing to purchase the home and that may be more money than you can get your hands on or more risk than you are willing to take. This approach may still be viable and suit some investors, but there are several options when it comes to real estate investment opportunities.

Can you still make money from a rental property?

Until the sharp rise in interest rates, low mortgage rates combined with escalating home prices (and an increasing pool of equity to borrow from) made buying a rental property in Canada a viable and profitable investment for homeowners. Even if you failed to generate positive cash flow based on your rental income and expenses, the increase in the value of the home would have likely made up for your miscalculations and made it a good investment. Fast forward to the present and we now see a very different situation. Variable rate mortgages that were around 2% are now closer to 7% and investment property mortgage rates may be even higher. Although home prices have rebounded sharply in many areas since the lows of early 2023, rising interest rates may once again slow down demand and there is a lot of uncertainty on which way home prices may go.

On the other hand, rents continue to rise in almost every market and over the last two years have increased by around 20% according to The housing shortage in many Canadian markets may put continued upward pressure on both rent and home valuations going forward. Investors will have to contend with higher financing costs and a lot of short-term uncertainty around which way home prices will go, but things may be looking up if you are thinking of entering the rental property market. Your financing costs, home valuations and rent trends/prices in your targeted market all need to go into your calculations.

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What are some potential risks or challenges associated with real estate investments?

Don’t be swayed by those reality TV programs that show how you can't miss at buying a fixer-upper and after a few renos, start raking in “easy money”. It can be done for sure, but there is a lot more that goes into evaluating an investment property than simply comparing the monthly rent cheque to the mortgage payment.

For example, property taxes can rise 5% (or more) annually in many municipalities and repairs and maintenance costs can be hard to estimate. If you have had any work done on your house lately, you already know the cost for both labour and materials has gone through the roof!

Managing rental homes is time consuming and you will also have to consider whether you have the skills to find great tenants, collect the rent, and take care of the maintenance. Relying on the convenience of a property management company is an option, but how do you find a reliable one and how much of your profits will that drain away?

Although the demand for rental housing is super strong in most markets, major repairs or delays with finding/vetting tenants could leave you with no rental income for a few months and some hefty bills to cover. Investing in homes is no guarantee of a steady stream of payments.

It is more important than ever to crunch the numbers and ensure your projected cash flow remains positive because those enviable gains in equity of the past few years may not be there to bail you out. You should hedge that bet by remaining cashflow positive every month and taking a long-term view when it comes to cashing in on any potential increase in the value of the property.

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Can I participate in real estate investment without owning property?

A lot of money and time goes into owning a rental property and that represents a significant barrier to entry. You will need a 20% down payment to get a mortgage if you don't plan on living in the property and that that may be more than you can get (or want to risk), especially if you are leveraging the value in your current home to source the funds. Being a landlord can also be time consuming and stressful. Fortunately, if you would like to dabble without going “all-in” there are few non-ownership real estate investment options.

What is a Real Estate Investment Trust (REIT) and what are the benefits?

A REIT is a company that owns and/or manages a portfolio of properties that could include commercial buildings, apartments, shopping centers, residential homes, offices, and other types of real estate. The diversity and mix of properties vary from one REIT to the next and there are currently around 35 REITS trading on the TSX. A REIT can be held in your RRSP or TFSA.

REITS are unlike stocks in that investors are usually paid a monthly distribution (dividend) based on the performance of the properties. There is also the chance for gains through appreciation of the share price. REITs are a convenient option to add more diversity to your stock portfolio. Unlike owning a property, REITs are completely liquid and can be easily bought and sold — you could start investing with a few shares purchased through an online brokerage.

The disadvantages are that you may not be able to find a REIT with a mix of properties you like, and your investment is only going to be as good as the REIT management. There are also Exchange-Traded Funds (ETFs) that hold a pool of REITs to help diversify exposure and lower the risk compared to owning an individual REIT.

How does real estate crowdfunding work?

Fractional property ownership or crowd-funded ownership is a relatively new real estate investment strategy where investors join together to collectively own a particular real estate asset — it could be an apartment building, commercial property, or even a residential home. It is different from a REIT in that you invest and own a share of a specific asset.

The property is sold in individual units and there are terms and conditions specific to each offer. Investors gain from sharing of rental revenues and the eventual sale of the property. Although you can get started with a very small investment, the maximum investment may also be capped, so you may have to find several opportunities.

The disadvantage of fractional ownership is that individual real estate assets can fluctuate greatly in value, and you can only sell and cash out your shares after the date prescribed in the ownership offer – they are not liquid.

Are there other alternatives to owning property for real estate investment in Canada?

Another alternative real estate investment which can offer exceptionally good returns is "playing the role of banker" and lending money to a private party, usually with your loan backed by the value of real estate. There are various reasons why some people have trouble getting a real estate loan or mortgage from a bank — they may be self employed or newly employed for example. Others may need some kind of bridge financing to tide them over for a few months and the situation doesn’t fit the bank’s rigid requirements. They will pay a premium to any lenders willing to help them out.

While due diligence is extremely important and you have to do your homework (and get expert advice), these types of opportunities do allow you to manage risk to a large degree and offer exceptional returns, especially as mortgage rates climb higher and banks get increasingly strict with their lending requirements. It’s a flexible real estate investment option that allows you to select opportunities that match your investing amount and timeline. For example, you may be able to find a short-term deal for $20,000 if that is what you need to match your investing situation.

Which of the above options will provide the best real estate investment depends completely on your situation. Property investment in Canada can be done a number of different ways and your first task should be to get some real estate investment education and grow your knowledge.

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