Investing in Real Estate - There’s more than 1 way!

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 decade, and it doesn’t seem like that trend will slow down any time soon.

When most people think about Real Estate investing, they will generally think ‘investment/rental properties’, and although that is a great investment, there are other options. 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 5 of the main ways that people can get involved in Real Estate Investing in Canada, either directly or indirectly:

1.      Rental Properties

Rental Properties are one of the most common and popular 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 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, Taxes (both on rental income and future sale), 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 be a Landlord, as that in itself can be a massive headache, especially if there are multiple rental properties in the portfolio.

The challenge that people have with this option is that it requires a significant amount of involvement and potential headaches. In the last 5+ years, the appeal of rental properties has decreased significantly due to multiple reasons, such as higher interest rates (most investors are now at a net negative in cashflow and are paying money out of their pockets to maintain the property), heavily favoured rules for tenants vs landlords, not being able to find good tenants, as well as home prices as a whole.

Also, most people don’t have 20% of the property value sitting around, which can be $200,000+ in major cities such as Toronto or Vancouver. So, although it may be something investors may want to get into, Rental Properties are not easily accessible to everybody. Although this can still be a great investment long term and returns can be healthy, finding the right property for the right price, and as importantly, finding the right tenants, can make all the difference between a great investment and a nightmare situation.

2.      Flipping Houses

Flipping houses is the least common and is done by a only small segment of investors. 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 significantly 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 (20% of property value)

-          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

-          Other (legal fees, 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.

Out of all the options, this is definitely the one that has the most amount of involvement and work, to earn the income, and the majority of people are not suited for that. Generally most people don’t make (significant) money until they’ve done 2 or 3 flips, as learning the process, how to deal with the trades and market trends takes takes time and experience. It’s not as easy as all the shows on TV make it out to be! However, once someone gets a good understanding of how to take the project from start to finish and doing it effectively and efficiently, there can be some good profitability.

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 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 projected return, which may or may not have a component of fixed returns included in it. Most projects range from 4-6 years and are structured in a ‘profit split’ way, where generally investors receive their principal back first, and then the remainder of the funds in the profit pool are split between the Developer and the Investors based on their original structure (it could be 60/40, 50/50 etc…).

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 ‘set it and forget it’ type of strategy and may be a great solution for those looking to diversify their portfolio. For someone who wants the least amount of headache and responsibility in regards to Real Estate Investing, this option can be very intriguing. Returns can be very intriguing as well, with successful development projects averaging 15-25% per year return.

There are still some risks involved in this type of strategy, as not every single Real Estate Development project gets completed or finishes. Investors (and their Advisors/Planners) 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 (REITs)

The simplest and often ‘least expensive’ way to get into Real Estate is through Real Estate Investment Trusts (REITs). A REIT is essentially a pool that investors can invest into that finances, operates, or owns income-generating real estate. In easy terms, it is like a Mutual Fund, except, instead of purchasing stocks and bonds, the portfolio buys and sells real estate properties. REITs can be public (traded on the Stock Exchange) or Private (through an Exempt Market Dealer) and will each have their own mandate. For example, some REITs are designed for residential apartment buildings, some invest into commercial or retail, or some a combination of different type.

REITs offer a very easy and ‘affordable’ way to get into real estate, as you don’t need the big down payment as the first 2 options, or the big lump sum for Developments. For example, investors can get involved with many Private REITs for as low as $5,000 or $10,000 initial investment. They can be considered to be modelled after Mutual Funds, since they are packaged products that offer a regular income stream, diversification, and potential for long term capital appreciation as well. Returns on Private REITs can average 8-12%/year (public REITs are generally lower than this), which makes them an attractive option for investors to diversify their portfolio.

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 just what an investor is looking for, depending on their 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 or owning the property when you invest in a REIT, rather, you’re just getting share of the income produced through those profits. 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.

REITs can be invested within your TFSA, RRSP, LIRA and other registered plans, which makes them a convenient to invest in for many people, especially those who want to shelter or defer returns.

5.      Mortgage Investment Corporation (MIC)

A Mortgage Investment Corporation (MIC) is a more indirect way of investing into the Canadian Real Estate landscape. A MIC is a type of investment fund in Canada that pools funds from investors to provide mortgage loans to borrowers secured by real estate. MICs offer an alternative fixed-income investment opportunity for individuals, allowing them to diversify their portfolios and access the lucrative mortgage market in Canada.

MICs provide investors with an income stream that is stable and regular and can be a great way to mitigate volatility in an investment portfolio. The MIC’s management is responsible for all aspects of the company’s operations, including the sourcing of suitable mortgage investments, the analysis of mortgage applications, and the negotiation of applicable interest rates, terms and conditions, instruction of solicitors, mortgage portfolio and general administration. Like an investment fund, the Mortgage Investment Corporation’s manager is paid a management fee, typically calculated as a percentage of assets under administration. The average return for MICs can range from 8-9%, and most MICs have a consistent track record.

They can be a great way to diversify an investors portfolio by adding the ‘other side’ of real estate, which is lending. Many investors often like to have MICs and REITs working together in their portfolio to mitigate risks and add diversification.

Just as REITs, MICs can be invested within your TFSA, RRSP, LIRA and other registered plans, so as to shelter or defer returns.

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 an investment, as there is no ‘one size fits all’ solution for investing.

If you are interested in learning more about the options, reach out to us!