Real estate investing generally doesn’t mean buying a home to live in. While a home purchase may result in appreciation (although probably a lot less than you think once you factor in interest, repairs, utility bills, taxes, closing costs and inflation), you’re not getting the tax advantages associated with investing or a monthly cash flow. And since you’re not getting any rental income, you’re sinking your own money into expenses that do not contribute to its appreciation. Think mortgage interest, property tax, insurance, utilities, lawn maintenance etc., In an ideal investment situation you would never have to dig into your own pocket because the rental income would cover all those costs.
Plus, since you always need a place to live, it’s hard to buy and sell your home at the most advantageous market time, as you would with a true investment. Instead, you usually buy your home when you need the space and can afford it, and sell it when you don’t want to live there anymore — it’s rarely possible to time the buying and selling as to when it will make you the greatest return, because your main consideration is if the house is serving your family’s needs, not if it is making you the most money.
Besides that, caveat, there’s plenty of ways to invest in real estate.
Here are a few common ways you can make a healthy return off property:
There are three main reasons Canadians invest in real estate.
If you manage properties yourself, real estate will require an enormous amount of time, money, and hassle. You’ll be dealing with tenants, constant maintenance or construction, and record-keeping expenses. To minimize the hassle, you can hire someone to manage it all for you. Or you can eliminate the hassle entirely by investing in REITs, or real estate investment trusts.
You can purchase individual REITs or a whole basket of REITs through an ETF.
REITs are the lowest-maintenance way to dip your toe into real estate investing. REITs are simply corporations that own swaths of real estate and lease it out to various tenants. They can own apartment buildings, malls, or industrial sites. REITs pay out all their taxable income to shareholders, which makes their dividends attractive. The best part is they trade on the stock exchange like any normal security.
The next easiest way to gain access to real estate investing is to rent out a portion of your principal residence. Whether you rent out a room to an international student or create a basement unit, you’d be smart to maximize an asset you already have.
Beyond those two options, real estate investing really depends on your skill set and how much time you have. House flipping is much harder and riskier than television shows pretend it is, and banks have become much stricter in recent years on lending for income-properties. Before you take the plunge do your research.
Real estate investing, like all forms of investing, is inherently risky. But there are a few additional risks that real estate investors must contend with.
A major one that few consider is that the government is more likely to interfere in housing than other sectors of the economy because it’s such a huge issue for voters. Witness 2016, when the Toronto and Vancouver markets were at their red-hot peak. Ontario and British Columbia both stepped in with measures designed to cool the marketplace. And it worked.
The government could always open up new areas for development or flood the market with supply or raise the tax on capital gains. One way to mitigate this is to invest in REITs that only deal with commercial tenants.
Another issue that may arise is interest rate risk, because when it comes to interest rates: What goes down must go up. And when, not if, interest rates go up so will landlords’ carrying costs. Vacancy rates rising and rents falling could pose a serious problem for investors.
Moreover, property is extremely illiquid, although this has been tempered by the popularity of second mortgages. If you need the money back for some reason, you’d have to sell the entire property. You can’t merely sell off a wing of the house.
There’s also an odd notion that property always rises over time. But the past does not guarantee the future. There are many economic forces that can have a negative effect on housing prices, and there are new ones to consider: What if climate change makes certain areas un-livable, or what if a steep population decline reduces demand?
Real estate investing is just one option if you want to build wealth. Securities like Mutual Funds, Segregated Funds, stocks and bonds offer a much more liquid place to stash and grow your money and don’t tend to rise or fall with the housing market. And don’t worry: You no longer must be an expert at understanding p/e ratios or spend time pouring over annual financial statements. Automated investing takes out all the hassle and the guesswork. When it comes to retirement planning, the sooner you start, the more time your money must grow. We have also well planned and executed investment strategy just like the real Estate investment, using other people’s money to make money concept which the Banks uses everyday basis.