When we think about investing in real estate, the first scenario that comes to mind is most likely owning our primary residence in the hope that its value will increase over time. But there are so many other ways to invest in real estate today, including options for all budget levels. Each approach carries a different level of risk, and as with any investment you’ll want to do some due diligence to make sure you’re spending your money wisely.
This article will prepare you for your adventures in real estate by taking a close look at what real estate investing is; how to start investing in real estate; and what type of real estate investing is a good fit for you.
What Are Different Ways to Invest in Real Estate?
Some methods of investing in real estate are “active” (owning your principal residence, owning a rental property, house flipping, etc.), while others are “passive” (REITs and mutual funds). Perhaps you’re already familiar with a few of the below approaches to real estate investment, while others might be entirely new to you.
Buy a Principal/Primary Residence
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The classic approach to investing in real estate is purchasing a principal/primary residence. When you buy your primary residence, not only are you buying a place to live—you’re buying a long-term investment. Instead of paying your landlord’s mortgage when renting, you’re paying your own mortgage, helping grow your net worth.
In order to buy your own residence, you’ll need to save up for a down payment. First-time homebuyers can withdraw up to $25,000 from an RRSP toward that purpose. For those who aren’t first-time homebuyers, the TFSA is the next best place to save for a down payment.
Indicators you want to be looking for when buying a principal residence are: a home in a good neighbourhood, with low crime rates and easy access to public transit and highways; a school district with a good reputation and rating; and close proximity to convenient amenities, like restaurants, shopping, and parks.
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Made popular by shows on HGTV, house flipping can make a killing when done correctly. With a house flip, you buy a “fixer upper” with a lot of potential, renovate it quickly, turn around and sell it for a handsome profit. But keep in mind that although it may look easy on TV, house flipping isn’t always a slam dunk. You can run into all sorts of issues and cost overruns (knob and tube wiring hidden inside the walls, mold, asbestos nightmares, etc.), so be sure to know what you’re getting into before deciding to go with this strategy.
To improve your chances of a successful house flip, you’ll want to look for a property that requires some TLC cosmetically (painting, upgrading fixtures, flooring, etc.), but doesn’t have any major faults, such as structural issues or a leaky basement.
Speak with a realtor ahead of time to make sure you’ll be able to resell the property for the amount you’re looking for. You’ll then want to crunch your numbers per the cost of renovations relative to the property’s estimated final sale price, to ensure you turn a profit.
Invest in Rental Properties
If you’re someone who’s risk adverse and house flipping is a little too nerve-racking for you, you might consider buying a rental property instead. While a rental property is certainly an active investment, you can choose to be as involved as you like. You can manage it yourself as the landlord or hire a property manager to deal with the tenants and look after the property for you. Just make sure in advance that you’ll make enough money in charging rent to turn a positive cash flow after factoring out the expense of the property manager.
Although the mortgage rates tend to be higher on rental properties versus your principal residence, you have the opportunity to earn some decent money if the home appreciates in value over time, in addition to generating rental income.
Similar to your principal residence, you’ll want a home in a decent neighbourhood that’s attractive to tenants. Quality tenants will be attracted to your property if a major employer, like a hospital, is nearby.
Buy a Vacation Property
When buying a vacation property, it’s important to consider exactly why you’re buying it. Is it mainly meant to be for pleasure—somewhere to relax away from the grind—or is it primarily an investment? If the latter, buying in an in-demand location (e.g. on a lake with beach access, an hour or two’s commute from the big city) could generate a decent amount of money from renting it out.
Are you not ready to be a full-time vacation property owner? Then you might consider buying into a timeshare instead. With a timeshare, you share the cost and usage of the property with other owners (although the tradeoff is that you won’t be able to earn rental income like when you own a cottage). If you’re looking to buy a timeshare, consider purchasing one from the resale market to get the best value.
Pre-Sale Condo Assignments
Looking for a passive way to invest in real estate? Then you might want to check out pre-sale condo assignments. A pre-sale condo assignment is when you, the investor/buyer, sell your rights to a completed condo to another buyer before the condo is complete. It’s called an “assignment” because you sign your rights to the new buyer. Condo assignments tend to be popular in hot real estate markets like Toronto and Vancouver where home prices appreciate faster than the rest of Canada. Please note that condo developers sometimes charge a 1% assignment fee for anyone looking to do this.
In terms of indicators, you’ll want to buy a condo in an area where condo prices are expected to continue to rise in the years to come. Your best source for that is by doing your own research about other future developments planned in the area and by speaking to a knowledgeable, local realtor.
An REIT, short for “Real Estate Investment Trust,” is a company that owns and operates income-earning real estate. REITs own a wide range of commercial properties, including offices, apartments, hospitals and shopping centres. Publicly traded REITs listed on the stock exchange can be bought through a broker.
Another way to invest in real estate through the stock market is via real estate ETFs (exchange traded funds) and mutual funds. Similar to an REIT, you can buy an ETF or mutual fund for companies that own and operate income-earning real estate.
Although past performance isn’t a guarantee of future performance, you’ll probably want to invest in something with a stable stock price history and a consistent history of paying dividends. You can find an REIT, real estate ETF or real estate mutual funds by searching online or by asking your financial advisor.
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Are you sick and tired of the banks making all the money from mortgages? Then why not get a piece of the pie yourself? With private mortgages, you essentially become the bank. You loan your money to a homeowner just like the bank would. A borrower might seek out a private mortgage because they don’t qualify at one of the big banks, perhaps due to bruised credit or a lack of income. The easiest way to find prospective borrowers and loan out your funds is with the services of a mortgage broker.
Unlike a mortgage from one of the big banks, you can expect to earn a higher interest rate, potentially making it an attractive investment. Just remember that with a higher interest rate comes higher risk, as these borrowers may have been turned down by the big banks for good reason. You’ll want to do your own due diligence to make sure you’re investing in a trustworthy borrower and a rock-solid property. Someone who’s trustworthy may have a lower credit score due to an unpreventable event in life, such as an illness or injury, but has a consistent track record of paying their debts on time and in full outside that anomalous circumstance.
Another way you can become a mortgagor is via a vendor take-back mortgage. A vendor take-back mortgage is where you, the seller, own the property and lend the money to the buyer to purchase it. Though relatively uncommon these days, vendor take-back mortgages are certainly an option if the buyer is running into difficulties closing a home sale. A vendor take-back mortgage can benefit the sellers as well since it allows them to close on the property. The sellers may have already purchased another property, which they need the equity from the home that they’re selling to close on that. Before going ahead, it’s important to be aware of the risks that come with it. Mainly, you could be liable if the buyer is ultimately unable to pay for the mortgage for whatever reason.
Rent Out a Spare Room
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You don’t have to own a non-owner occupied rental property to become a landlord. Thanks to short-term rental websites like Airbnb, you can rent out a spare bedroom in your residence and make some extra cash. Just be sure to check with your municipal bylaws and condo board rules (if applicable) before renting out your place, as more and more cities are imposing tougher restrictions. Also, you’ll want to keep a close eye on the property, as short-term tenants may not take as good of care of the property as you might otherwise would.
The high cost of homeownership in some real estate markets has others considering different ways to work toward owning real estate. If you’d like to own a home, but you can’t seem to save enough for the down payment, rent-to-own is worth considering. With rent-to-own, the seller gives the tenant the right to buy the property at a future point in time, with a portion of the tenant’s monthly rent gradually building up a down payment for purchase. Tenants are also typically required to make a deposit toward the final sale price (typically at least 5% of the purchase price made at the time of purchase).
Although you can approach your landlord and suggest rent-to-own, it’s easier to look for a landlord and building that specifically offers the rent-to-own arrangement.
Commercial properties include everything from shopping malls to office buildings and in between. Although you can invest directly in these, most of us don’t have a spare $1 or $2 million lying around to go toward the hefty down payment (not yet at least!) The more realistic way to invest is through a commercial real estate company’s mutual fund or ETF.
How Much Money Do I Need to Have Saved Up in Order to Invest in Real Estate?
With passive real estate investments such as REITs, real estate ETFs and mutual funds, you could invest for as little as the share price.
If you want to actively invest in real estate by owning a property, and you plan to live there (it’s ‘owner occupied’), you’ll be required to make a down payment of at least 5% on a home with a purchase price under $500K. Note that the down payment will be required to be a larger percentage of the purchase price if the home price is over the $500K and $1 million thresholds. If you’re planning to buy an investment/rental property (a non-owner occupied property), you’ll typically be required to make a down payment of at least 20%
Whatever route you take, the good news is that there’s a way for almost everyone to invest in real estate regardless of their income or savings level.
If you are thinking about investing in Real Estate contact us for a FREE consultation to see what is the most effective investment options for you. Call us at 519-573-4404 or Email firstname.lastname@example.org