As an investment asset class Real Estate is widely regarded as one of the best. The vast majority of wealth created throughout Canada is thanks to real estate. Pension funds, financial institutions, individuals and even the Canada Pension Plan use real estate to fuel investment growth and provide stability and security in their investment portfolios.
Real Estate investments can come in many different forms, ranging from high risk / high reward to low risk with stable hands-off investments. Some options are even available for RRSP or TFSA accounts which helps with the taxation issues.
4 Ways to do Real Estate Investment
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. You can find many different tv shows on this subject which make it look easy: 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 - let’s just say this is not for the faint of heart. Financing these projects is difficult so be prepared to have deep pockets of cash available. The trade-off can be great though if you are good at this. One major key is buying the right property at the right price, and the second key is being handy. The investment gain is typically considered a capital gain, unless this is your primary business in which case the income could be considered business income.
Buying and Holding Rental Properties. This involves purchasing a property and renting it out and may be one of the most popular ways to do 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 setup to invest in real estate, often in the commercial real estate 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 the various stock market exchanges which allows a very small minimum investment. Other REITS are privately managed and allow investors to have a more hands-on approach in selecting the properties to invest in.
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 RRSP’s, RESP’s RRIF’s or TFSA’s.
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.