Most people thinking of buying real estate as an investment often wonder if it’ll be worth it. Is real estate a good investment? Truthfully, there’s no easy answer to that. Property as investment can be lucrative and is considered as generally relatively safe, but it does come with its own risks and things to consider.
Below we have compiled a guide to real estate as an investment, where we’ve assembled information on:
- Potential real estate pros and cons
- Real estate investing tips
- The difference between commercial and residential real estate
- How mortgage insurance can offset risk
Are Real Estate Investments Safe?
Real estate investments are often considered a generally safe avenue to generate income.
The Canadian housing market is fairly stable with steadily rising property values. While in many areas of the world building home equity can take years or decades, the Canadian market is generally hot with home values appreciating not only yearly, but monthly (Toronto or Vancouver, anyone?).
Renovating or tearing down and rebuilding a property can be a reliable way of building home equity in a short time span as well.
Whether you’re buying real estate as your primary residence to passively accumulate equity over time or to rent out as a rental property, both are generally steady, reliable ways of investing.
Real Estate Investment Risks To Take Into Account:
Real estate investment may seem risk-free, but there are some setbacks to consider.
Choosing The Wrong Location
The location of your property can make it difficult to rent or can affect its appreciation. Do your research and find the best areas where you want to buy to get the most out of your investment.
Negative Cash Flow
When acquiring a property, plan out the income versus the expenses that will be generated. Otherwise, you can end up with a negative cash flow. Negative cash flow is when the cash outflows are bigger than the income and can originate due to high vacancy of the property, higher than expected maintenance expenses, or not charging enough rent, among other factors.
High Vacancy Rates
If you own property with the intention of renting out, you need tenants to generate rental income. However, there is always the risk of a high vacancy rate when investing in real estate. Moreover, this becomes more of a concern when you need that income to pay the mortgage, property taxes, maintenance, or other expenses.
The only way to avoid this problem is to buy a property that is in high demand. That means that your property must have a good location, a rental price in line with the market range, and list your rental where prospective renters can find it, perhaps with the help of a realtor.
One of the most recurring problems when investing in real estate is problem tenants. A bad tenant can bring with it a myriad of problems. The most recurrent ones are not paying the rent, not reporting maintenance problems, housing more people than allowed in the contract, or neglecting or even damaging the property. Depending on your province, it can be difficult to evict a problem tenant even with cause.
The only way to protect yourself from tenant problems down the road is to conduct a thorough screening process to minimize risk. While this can take a bit more time and back-and-forth, it can save you a lot of headache (and money!)in the long run. Be sure to check references, run a credit check, and verify applicants’ incomes to ensure they can indeed cover their monthly rent.
Lack Of Liquidity
Another drawback of investing in real estate is the lack of liquidity. Unlike stocks or mutual funds, which are easier to sell, with a property, you could end up selling it at a price below market cost if you need the money urgently. However, it’s possible to take advantage of the equity in your property to apply for a home equity loan or a home equity line of credit (HELOC).
There are a number of factors that can cause your investment to drop in property value or otherwise yield negative returns.
While there are certain things you can do to protect yourself against such risk, other factors can be unforeseen and/or out of your control. Be sure to do your due diligence by working with an experienced realtor and home inspector.
- Hidden costly faults in the construction including but not limited to: foundation, insulation, plumbing, electrical, roofing, HVAC
- Unexpected problems down the road/maintenance and upkeep (mold, roof replacement, HVAC replacement, etc)
- Market downturn or correction
- Nearby construction affecting property value (loud train track installation, low-income/public housing, etc)
How Investing In Real Estate Helps You Build Wealth
Real estate is commonly considered one of the most stable and secure ways to build wealth. In addition to almost-guaranteed home value appreciation, there is no capital gains tax on the primary residence in Canada, which means that your wealth will continue to grow.
It is a reality that Canadians today consider their home as a long-term real estate investment and not just a place to live. Home prices in the Canadian housing market continue to rise. For example, in November 2021, the average property value stood at $720,850. That is up 19.6% year-over-year from November 2020.
Although the federal government has tightened mortgage regulations in the face of falling interest rates in the Canadian real estate market, investing in real estate is still considered a safe investment option for building wealth.
Types Of Investment Properties
All properties are investment properties and can be divided into two different types. The first is the primary residence (the house you live in). The second is what we can define as an investment property. It is a property whose objective is to generate cash flow – either from leasing to tenants, flipping, or otherwise.
Finally, it is advisable to hire a property manager if you do not have experience in this area. A property manager will be in charge of repairs, communication with tenants, and property management on your behalf.
How To Invest In Real Estate In Canada
Self-managing your property can be extremely time-consuming and expensive. You have to take care of your renters and construction costs. If you need a little extra help with this you might hire a property manager.
You can either completely reduce the hassle by establishing REITs or Property Investment Trusts. It can be bought separately from an ETF or by purchasing all the REITs from another ETF. REIT investments offer an inexpensive, easy way for you to start investing in the property industry. REITs are corporations that own large parts of the property and then lease the land to various investors.
Real Estate Investment Groups
REIG is a type of fund that invests in properties. If you are looking to acquire an apartment and want a place in the neighborhood without having to deal with landlords or tenant issues then an investment company could make the right investment decision for you.
Companies will buy or construct buildings, sometimes apartments, and then let investors buy them in their company and thus join the organization. An individual investor can buy one apartment or several. But the firm manages it runs the investment group all over it, managing maintenance, advertising, and searching occupants and tenants on site. This management enables them to collect a portion of their monthly rent from their employees.
Real Estate Mutual Funds
Mutual funds invest mainly in REITs and property operators. They provide an excellent way for investors to obtain diversified exposure to properties with very little capital investment. According to their strategies and diversification goal, investors receive broader asset choices compared to buying specialized REITs. Like REITs, these investments have a very good liquidity profile.
Another major advantage of this type of investment is that it provides reporting and research data to its clients for review. This includes information about the acquired assets and management perspectives on the viability of real estate investments and asset classes.
Why Do People Invest In Real Estate?
Canadian property investment is often considered to be among the best business opportunities and is far more stable than real estate in many other areas of the world. The barriers to entry are fairly accessible for those with the capital to invest, otherwise requiring only basic knowledge on real estate investing. There are even investment property firms which help with the day-to-day of managing investments, which can make real estating investing in Canada more hands-off.
Due to banks lending money at relatively low rates, this makes a property as investment an attractive option for those who can qualify for a loan.
Tips To Consider Before Investing In Real Estate
Real estate investment is not always risk-free. Having the down payment to buy the house is not the only element to take into account. There are other essential factors to consider making this experience as smooth as possible. After all, this is perhaps the most important purchase you will ever make.
The real estate market is in constant movement. That’s why staying informed of trends and forecasts is a priority. Remember not to rely on a single source. Research, read, and educate yourself. There are many online resources and investment associations where you can find answers to your questions.
Be Realistic About Your Budget
The first thing you should do is calculate the money you have and the money you can borrow before getting into real estate investment.
Next, calculate the purchase price plus the renovation of the property. Finally, keep in mind that the main risk when investing in real estate is spending more than you can afford. To solve this problem, you can talk to a lender or use an online calculator, such as Canada mortgage and housing corporation, to give you a better idea if you are in a position to make this investment.
Before buying your first property, try to pay off all your debts (student loans, medical bills). Otherwise, instead of seeing positive results, you will end up owing more money than you can afford. (This excludes leveraged loans.)
Don’t forget to check if you are eligible for the Home Buyers’ Plan (HBP), a first-time homebuyer incentive. The program offers 5 or 10% of the home’s purchase price to put toward a down payment. It also helps reduce monthly mortgage payments without adding financial burdens.
Improve Your Credit Score
If you don’t have the minimum credit score required for a mortgage loan, it may be difficult to get one. Credit scores in Canada range from poor (around 300) to excellent (900), and the minimum score required for a loan is 650. Starting at 650, lenders consider you a safe candidate for a mortgage loan.
On the other hand, if you are looking to improve your credit score, you should pay your bills on time and consolidate your debt, among others, in order to build your credit score back up over time. If you want to learn more about improving your credit score, you can find more information here.
Get A Real Estate Agent
A real estate agent can be an essential element for purchasing a property. Though you don’t have to hire a real estate agent, a novice can quickly become overwhelmed without the expertise of a real estate professional.
A real estate agent’s job is to guide you in any real estate-related endeavors. This can include:
- Updating you on current real estate market conditions
- Finding exclusive listings
- Negotiating on your behalf
- Walking you through paperwork
- Connecting you with home inspectors
- Showing and listing your home to prospective renters/buyers
A good real estate agent can help you tremendously, so don’t skimp on the time invested in finding the right one. Keep in mind that it should be a person you feel comfortable asking all kinds of questions. Remember that you are making one of the most important investments of your life.
Location Is Everything
Location is perhaps the main factor when it comes to buying a property. This element is so influential that even if the house is not in the best possible condition, real estate investors will look to buy it simply because of where it is located. A good location is when the property is close to shopping areas, public transportation, or businesses, or is simply in an area with high property values.
Become Familiar With The Market
The current housing market trend determines how well an investment is going to perform and how fast. All people thinking about buying homes should be aware of the real estate market’s history as well as the expected trends.
It can also be useful to evaluate historical information alongside current trends. Real estate is often seen as an industry that is cyclical due to the impact of the economy. Understanding the data in the market will help you get the market right.
Commercial VS. Residential Real Estate Investing
To know which is the best form of investment we need to be clear about the difference between the two. The different avenues have their advantages as well as challenges that should be carefully examined in relation to objectives, risk tolerance, capital, and timing. This will give you an idea of which investment options will be most effective in your situation.
Benefits Of Commercial Real Estate Investing
The market for commercial land consists of two different types: apartment buildings and commercial buildings including warehouses and offices. Although both are commercial properties, the differences are significant. Commercial property is typically classified as a home or apartment that has five or more apartments that are used as living space. Investors buying condominiums, duplexes, and quadruples will therefore consider commercial real estate. Compared to apartment-type commercial buildings, office buildings and stores are usually the most popular commercial buildings with businesses.
Commercial property usually has longer leases than residential property. Residence property leases generally last 6-12 months, whereas commercial leased land may last several months. Some properties are offered for lease with lease periods between 10 years. Commercial leases provide a means of protecting investments over long periods of time. Leasing for longer periods may allow tenants to stay longer while preserving cash flow, while reducing vacancy rates. It can be safer (and more hassle-free) than residential housing, which usually experiences quick rent turnovers.
Higher Return On Investment
Returns on investments are average ratios for gross income minus investments. The ratio determines what a person’s earnings are after the necessary payment has been paid back. This is determined using an equation as follows: ROI = Investment Return – Investment Expenses.
Benefits Of Residential Real Estate Investing
Like a family, homes are very different. Condominiums often come in high demand in cities due to their compact size. Single-family homes are houses meant for single-family occupancy with direct access to the street. A vacation home is usually a secondary residence situated in a tourist destination. This property is an excellent getaway for families and can usually be booked for weeks or even months in advance. These properties are different in size, locations, and purposes, but are all listed as residential real estate.
New Residential Rental Property Rebate (NRRP)
Investors must pay HST on investment property. The property may cost far more in value than originally planned. Fortunately, new investors can use the New Residential Rental Property (NRRP) Rebate to reduce their financial stress and lower their monthly expenses. The HST refund is available for investors who have recently purchased constructed or completed renovations of the rental properties. The rebate is intended primarily to repay the vast majority of HST provided investors apply for the NRRP rebate within two years of purchase.
More Potential Tenants
For better or for worse, as home and other costs of living prices rise more people remain rented for longer. Investors and landlords benefit because there are more potential tenants with the added benefit of being able to be selective about which renters they accept.
Protect Your Real Estate Investments…and your loved ones
If you buy a home with a downpayment of less than 20%, you will require CMHC insurance which is mandatory by law in Canada.
CMHC insurance protects the lender (often case the bank) in the event you can no longer meet your payments. But about protection for you and your family?
In the event of a homeowner’s death, before they can pay off your mortgage, the onus then falls on the next kin – usually a partner – to take overpayments. If they’re unable to, the property may get repossessed by the lender.
As much as we don’t like to think it, this scenario is more common than we’d like to imagine. Mortgage life insurance is a type of term life insurance designed to protect your loved ones in the event of your death while a mortgage is outstanding.
Unlike traditional life insurance, the direct beneficiary of the policy is the lender, and the set term corresponds to that of your mortgage. As the name suggests, mortgage life insurance is a type of personal protection solution specifically designed to pay off your mortgage. Unlike CMHC insurance, a mortgage life insurance policy protects your loved ones and not your lender.
Mortgage Insurance Group is your best choice
Navigating the real estate market is not an easy task. Loans, paying off outstanding debts, finding the right home, making a down payment… are just some of the elements to consider before starting this journey.
That’s why we’ve created mortgage life insurance that backs you and protects you – not your lender.
We have made our mortgage life insurance affordable and easy to obtain: no medical exams, no face-to-face meetings, no tedious paperwork. We offer up to $1,000,000 in coverage, and you can decide for how long you want the protection (10, 20, or 30 years).
At Mortgage Insurance Group, we pride ourselves in the flexibility of our plans. Unlike other options on the market, your coverage can remain in force, and your family can use the monetary benefit in the way that suits them best…even after your mortgage has been paid off
If you would like to learn more about your mortgage life insurance coverage options, fill out our application form for a pressure-free conversation with one of our licensed advisors.