In today’s market, people often look at different ways to diversify their investment portfolio. Specifically, since the market crash in 2008, a lot of investors have been unsure or scared to get (back) in to the markets, and have been looking at alternatives. Real Estate investing has become more and more popular, especially over the last 6 or 7 years, and it doesn’t seem like that trend will slow down any time soon.
What most people don’t know is that there are several different ways that they can get involved with or invest in Real Estate, and they can vary drastically. Each will differ in regards to the amount of capital required up front, the control & responsibilities that you have, the costs and also the overall intended result.
Below are 4 of the main ways that people can get involved in Real Estate Investing in Canada:
1. Rental Properties
Rental Properties are one of the most common ways people use Real Estate in their investment portfolio. Using this strategy, someone would purchase a home, with the intention of keeping it for a period of time (can be short or long), while renting it out to a tenant. This creates an immediate stream of income, but also creates additional assets and debt to their name.
Generally, to purchase a rental property, the buyer would be required to put a minimum down payment of 20% of the property’s value, and then would have the responsibility of qualifying for and paying the mortgage on the property (if borrowing is involved). Additional responsibilities include finding tenants, maintenance/repairs, paying property taxes, as well as covering any costs associated with having this investment. Costs usually are made up of: Real Estate Broker Commission, Closing/Legal Costs, Taxes (varies per province), Home Insurance, and potentially any fees associated with hiring a Management Company.
Hiring a Management Company might serve well if a person does not want to have all the duties a Landlord would, as that in itself can be a massive headache, especially if there are multiple rental properties in the portfolio.
2. Flipping Houses
Flipping houses is something not a lot of people get into, and is more common in the high demand areas around the country. It is also more common with those who have more experience as well as time to manage their projects. This is essentially where someone would buy a property, renovate it, and then sell it right away with no expectation of renting it out.
Most people who choose to do this strategy will do so with either ‘fixer uppers’, a foreclosure property, or a house that is selling a lot below market value in the area. This can be a great way to make profit, especially on properties that are far below market value (specifically foreclosure properties), but it does not come without its responsibilities.
When doing this type of strategy, there are several pieces of the puzzle that have to be dealt with, specifically in regards to costs/fees. Most of the costs incurred are up front, meaning you have to ‘spend money to make money’, which can be a challenge for some people. Generally the costs/fees would involve:
– Down payment on the property
– Real Estate Fees on Purchase
– Mortgage Interest during the time you have the property
– Renovation costs (i.e. parts & labour)
– Potential zoning costs
– Real Estate Fees on Sale
– Closing/Legal Costs
– Other (appraisal, home inspection, designers etc…)
Along with the costs, it also takes time to go through the entire process, from picking out the property, to starting the renovation, to completing the renovation, and finally selling the property. This can become quite a headache for some people as, often in the construction world, things don’t always finish on time and on budget. Overall, it would require more capital up front than just buying a rental property, as you need to account for all the other costs in regards to renovating and flipping a property.
3. Real Estate Development
Real Estate Development is probably one of the faster growing strategies that people use when getting involved in Real Estate investing. This strategy involves a group (usually large) of investors who essentially all pool or invest their money into a Real Estate Development Company. The Company would have 1 or more different real estate projects that they are working on, ranging from commercial to residential, and raise capital through individual investors. The investors would choose which project they want to invest in, and would generally be ‘locked in’ to that investment for a specific term or until that project is completed. The Development Company would usually offer some sort of fixed rate interest return that would be paid to the investors either quarterly, semi-annually, or annually, and once the project or term is completed, the principal invested would be given back to the investor.
There are, however, sometimes restrictions on which investors can get into this type of strategy. Depending on the province or territory the investor lives in, there might be an ‘accredited investor’ restriction, which means an individual would have to have a minimum net worth or capital base before they can get involved. Some companies also have a certain minimum investment which could range from $50,000 to $150,000, depending on the project or amount of capital they need to raise.
This type of investing is generally one of the least ‘involving’ strategies, as essentially the investment would be given to the Development Company, and they would take care of everything in regards to the project. This can be considered a type of ‘loan’ to the company, in that, they would pay investors a fixed interest rate for as long as the money is invested with them. For someone who wants the least amount of headache and responsibility in regards to Real Estate Investing, this option can be very intriguing.
There are still some risks involved in this type of strategy, as not every single Real Estate Development project gets completed or finishes. Investors should definitely do their homework in regards to the type of project, the location, the demand in that area, as well as the company’s history and previous projects.
4. Real Estate Investment Trusts
The simplest and often ‘least expensive’ way to get into Real Estate is through Real Estate Investment Trusts (REITs). A REIT is essentially a collection of Real Estate Assets that you can invest in all at once, often with a small amount of capital needed, as compared to the other options. A REIT is an income producing product that trades on the Stock Exchange (there are a few private REITs that can be invested into directly also). They can be considered to be modeled after Mutual Funds, since they are packaged products that offer a regular income stream, diversification, and potential for long term capital appreciation. There are also some Mutual Funds that invest directly into Real Estate, that can be an option for those who are not comfortable doing online trading themselves, and want the services of an Advisor.
Whereas the previous 3 options will generally deal with 1 property at a time, REITs have multiple properties within one investment product. This can be a positive or a negative depending on the persons overall objectives, risk, intended outcome as well as Time Horizon. REITs can be considered more of a long term, gradual growth type of investment, which might not suit someone looking for short term gains.
Another thing to consider is that you aren’t actually investing in or owning the property when you invest in a REIT, rather, you’re just getting share of the income produced through those properties. REITs use the pooled money from all the investors around the country to purchase, rent and sell properties. Income can be generated from rent, sales or mortgages on these properties.
When investing in anything, it is crucial to understand the details of what is being invested in, all the different options, as well as the pros and cons of each option. Real Estate is no different. There are several different options, each with pros and cons, each with different responsibilities, objectives and risk tolerance, and should be researched thoroughly before being used. The advice of an Elite level Financial Advisor should always be considered before making any investment, as there is no ‘one size fits all’ solution for everybody.
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