Real Estate Investing: 4 Strategies (including TFSA and RRSP options!)

Are you considering investing in real estate, but don't know where to start? There are several different options to consider, each with its own set of benefits and drawbacks. In this week's post, First Foundation's own Tyler Pfeiffer discusses four popular ways to invest in real estate: flipping, direct ownership of rental properties, real estate investment trusts (REITs), and private mortgages.

• House Flipping. This involves purchasing a property and selling it at a higher price. This type of investment would be best described as high risk with high return potential. It looks easy on TV: buy a cheap house, fix it up, sell it for a huge profit, all in 60 minutes. Don’t believe everything you see on television though; financing these projects is difficult so be prepared to have plenty of cash available. This can be a great way to make a quick profit if you have the skills and resources to handle renovations and repairs. The investment gain is typically considered a capital gain unless it's your primary business income.
• Buying and Holding Rental Properties. Purchasing a property and renting it out may be one of the most popular ways to participate in real estate investment. The goal is to make enough rental income to cover off all the expenses and make a profit. This is a long-term investment option, providing the potential for increased equity by paying off the mortgage balance and having the property increase in value. Rental properties can be a great way to build your net worth provided that they are managed efficiently. On top of buying the right property at the right price, it is very important to find the right tenant. A bad tenant can do a lot of damage to this investment program either by not paying the rent on time or physically damaging the property. These properties can be financed but most lenders will expect you to be able to keep up the mortgage payments on your own, just in case the property is vacant for some time. Each lender has different qualification criteria so it’s important to have an experienced mortgage broker in your corner.
• Real Estate Investment Trusts (REITs). A real estate investment trust is a corporation that is set up to invest in real estate, often in the commercial market. This type of investment allows investors to participate in the real estate market with a minimal investment and without having to be too hands-on. Some REITS trade on stock exchanges which allows for a small minimum investment and provides liquidity. Other REITS are privately managed and allow investors to have a more hands-on approach in selecting the properties to invest in. Private REITs usually have less liquidity and are not subject to stock market fluctuations.
• Private Mortgages. Investing in private mortgages can provide investors with consistent cash flow and a very defined risk level. Investors can choose the amount of risk they are willing to take on and negotiate a fixed rate of interest that they require. There is some work involved by sourcing the mortgage deal, analyzing the risk and managing the payment process. Many people choose to invest in private mortgages by investing in a Mortgage Investment Corporations (MIC). A Mortgage Investment Corporation is a company that uses investor funds to lend out on mortgages and can be a great real estate investment. The mortgages are often provided for construction purposes. Other MIC’s lend to individuals that cannot qualify for mortgages through traditional lenders - for credit or income verification reasons - which can lead to a higher risk profile. The MIC will mitigate the risk by pooling the mortgages together, that way the risk is spread across many different borrowers and investors. Some MICs are publicly traded on the stock exchange but most are privately managed. The investment income generated from a MIC can provide regular income and is considered to be interest income for tax purposes. These investments can be held in registered accounts such as RRSPs, RESPs RRIFs or TFSAs.

Investing in real estate can be quite lucrative if you do your homework, get great advice, and follow a plan. It’s always a good idea to be diversified and to include real estate as part of your portfolio.

Our Financial Planners can help you determine how to fit real estate into your financial plan.

Contact First Foundation Today!