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Real estate investors buy, lease, rent, and sell pieces of real estate for profit. For many investors, it's a key asset in their portfolio diversification, which involves combining numerous assets (stocks, bonds, real estate, crypotcurrencies, etc.) to achieve a balanced portfolio that minimizes risks and maximizes gains.
Real estate investors make money in numerous ways. They can buy distressed or undervalued properties, rehab them, and resell them for a higher value. Or they could buy rental and vacation properties and earn recurring revenue off rent. They could also buy commercial properties, such as warehouses and office spaces, and rent them out to businesses and corporations.
The great thing about Canadian real estate investing is that it has no shortage of options. Whether you want to buy property and manage it yourself, or take a hands-off approach and invest in a fund, you can surely find a method that fits your budget, time, and schedule.
Let's look at the most common ways to invest in Canadian real estate and see which ones might be best for you.
1. Buy a house
2. Flip a house
3. Buy rental property
4. Buy commercial real estate
5. Buy vacation property
6. Invest in real estate investment trusts (REITs)
7. Buy land
8. Issue a private mortgage
Most Canadians are real estate investors without even realizing it. Yes, when you buy a home, not only are you buying four walls to live in, but you're also putting your money in a long-term investment called equity.
Equity is the difference between what you owe on your mortgage and the value of your home. As you make more monthly mortgage payments, your equity — your investment — goes up. Likewise, as your home increases in value, whether because the overall market is gaining value or you renovated your property, your equity increases (if your home's value goes down, the opposite happens).
If your home is the place where you live for most of the year, you'll label it your “principal residence”, which can help you get a tax exemption for capital gains if you sell the house later.
Thanks to HGTV, house flipping is probably the most popular real estate investing strategy out there. It's also the most misunderstood and underestimated in terms of work.
The most common way to flip a house is to buy a home in dire need of a cosmetic lift (called a “distressed property”). Additionally, you could also buy foreclosed or auctioned homes, as these properties often sell for less than market value. As you do renovations to the house, the resale value tends to increase. Once you've made the home safe to live in, you can list it for a higher price.
In theory, house flipping can seem like a lucrative idea. But in practice, it can be difficult to keep your rehabbing costs low. Property flippers must know which renovations and repairs will yield the highest resale value, as some will cost you more than the return on investment.
Another challenge is knowing where to find properties. Some house flippers do what's called “driving for dollars,” in which you physically (or digitally) drive around neighborhoods looking for vacant or distressed houses. Others will scout auctions for foreclosures or pre-foreclosures. You might even want to hire a real estate agent or property wholesaler, someone who can bring deals to you.
If house flipping sounds like too much work, you could buy rental property instead.
In fact, as more and more Canadians are renting for longer periods of time, becoming a landlord isn't such a bad idea. As a property investor, you could rent out single-family homes, condos, apartments, duplexes, or even townhouses. Rent from your tenants will produce extra cash flow, and you could also benefit from long-term appreciation of your property.
Keep in mind, you'll be in charge of the maintenance and upkeep on the property. The mortgage rates on residential property are typically higher than those on your primary residence. You'll also need to keep a long-term perspective with rental properties, as it could take years before you recoup your initial investment.
Commercial real estate is rental property for businesses and corporations. This includes malls, shopping centres, industrial complexes, grocery stores, and offices.
Similar to rental properties for residential areas, commercial property requires a large upfront investment—but much more. You'll typically need more than a few million (possibly even billions) to even sit at the table of commercial investors.
Vacation properties are short-term rentals, such as Airbnbs or bed and breakfasts. It doesn't have to be separate from your principal dwelling: the intersection of technology and hospitality has made it easier for people to find accommodation (think: Airbnb), and you could easily rent out a room in your home.
More ambitious real estate investors will want to buy vacation property near key Canadian destinations, such as Blue Mountain, Jasper National Park, Niagara Falls; or in big touristy cities, such as Quebec City, Vancouver, or Montreal. If you can handle the maintenance and cleaning of your property, you could potentially make a killing off tourism. Plus — when you want a vacation for yourself, you have a vacation spot you can go to. Who knows, it could end up becoming your retirement home.
Just be aware of the investment costs: you're in charge of the maintenance, upkeep, and cleaning, not to mention the extra mortgage payments. And, if we ever experience another 2020, you'll have to figure out how to balance potential losses with your other income.
Not everyone wants to pound nails or manage property. Thankfully, for real estate investors who prefer a more hands-off approach, you can always invest in a Real Estate Investment Trust (REIT).
A REIT is basically a real estate company that owns and manages numerous properties. As a REIT investor, you and several others pool your money and allow the company to use it for their real estate endeavours. In short, they do the dirty work. You provide the money and earn profits.
As with other investments, REITs have investing risks. The biggest is losing money when the value of your REIT drops due to either the underlying property becoming less valuable or rising interest rates digging into your REIT company's profits.
But if you're okay taking on these risks, REITs can be a great investment for your portfolio. For one, REITs pay dividends. That alone can come in handy, as the extra money from dividends can give you a steady stream of income to supplement your normal paychecks.
Secondly, REITs can diversify your portfolio. Depending on your REIT, you could invest in numerous properties across Canada, not just one region. That can give you a major hedge against total loss if the real estate market performs poorly in one area.
Finally, REITS give you an easy way to invest in real estate without requiring you to actually buy property. As with buying property, you still want to be strategic about which REIT you choose. You don't want a REIT that's invested in poorly performing areas. But if you make a solid choice, you can expose yourself to real estate in a passive way.
As Mark Twain once said, “Buy land. They don't make it anymore.” When you own vacant land, you can rent it out for agricultural or recreational purposes. You could also sell it if it becomes more valuable, or you could build on it.
Instead of buying property or investing money in a REIT, you could take another approach to real estate investing. You could become a private mortgage lender. As a private mortgage lender, you play the role of the bank. You lend money to homebuyers, charge an interest rate on what they borrow, then slowly take back in what you lent out.
Why would homebuyers come to you for money? Well, they may have no choice. They could have poor credit, or their income threshold or job status may disqualify them from getting a traditional mortgage. Either way, a demand for private mortgages does exist. And if you have a lump sum growing by a meagre interest rate, lending it out as a private mortgage could help you earn more.
In Canada, you pay a capital gains tax when you sell property for a value higher than the amount you paid for it. The keyword here is “sell.” Only when you sell your property do you lock in your capital gains. If you don't sell, you won't pay taxes.
Contrary to what some people think, your full capital gains aren't taxed at your marginal tax rate. Only half of the capital gains are subject to your marginal rate. So, if you flipped a house and made a profit of $100,000, only $50,000 would be subject to the capital gains tax.
Finally, keep in mind, capital gains apply to properties and houses that aren't your principal dwelling. If you profit from the sale of your main home, you'll qualify for a tax exemption.
Adding real estate to your portfolio could be a smart choice. You can diversify your investments, take advantage of certain tax breaks, and create a solid stream of income that could carry over into reitrement.
But, as with any investment, you want to know what you're doing. The gains on real estate investing can be immense. But so can the losses. And while you may feel motivated in the beginning to flip homes and manage rental property, the maintenance and upkeep, especially in storm-prone areas, can get old fast.