Updated: Nov 30, 2019
A recent survey by Ontario Securities Commission found that 45% of pre-retired Ontario homeowners (45 years old and up) are relying on real estate investment – specifically, the rising prices of their homes - to fund their retirement. This explains that some people consider their primary residence an investment, and rightfully so. While others, opt for other types of real estate investment, such as owning a rental, Real Estate Investment Trust (REIT), flipping homes, and others.
WHY INVEST IN REAL ESTATE?
In Canada, investment in real estate has gained its popularity over the last few years due to the promise of greater returns compared to more conventional investment options, such as stocks or bonds. How wide-spread exactly is an investment in real estate?
Well, consider this. Canada’s total national wealth hit $11.415 trillion in the third quarter of 2018, and $8.752 trillion of it is in real estate. This means that 76% of our country’s wealth is made up of real estate investment. When it comes to primary home ownership, according to Statistics Canada, more than 9.5 million of the 14.1 million households in Canada owned their home in 2016. That’s a homeownership rate of 67.8%.
While there are many factors that contribute to trends in homeownership – from the housing stock, availability of alternatives homes and access to financing – many Canadians consider it a long-term investment.
Let’s review the four types of investment in real estate in the Canadian market.
INVESTMENT #1: YOUR PRIMARY RESIDENCE
Considered to be a classic approach to real estate investment by many, purchasing a primary residence is a form of a long-term investment. While different geographic areas have their own unique factors that determine the value of the home, overall the prices of homes continue to rise year over year. When looking to purchase your primary residence, you maximize its investment potential by paying close attention to a good neighbourhood with easy access to public transit and highways, public and private schools with a good reputation and rating, and geo proximity to restaurants, parks, and shopping malls.
Buying a home also means your purchase would appreciate over time. And as you make mortgage payments every month, one part of the payment covers the interest, while the remainder pays down the principal balance. Paying the principal is like depositing money in your bank account, making it available for reinvestment purposes.
As for the tax benefits, according to TSI Network, a hub for investment insights, home ownership is a great tax shelter, because gains on your primary residence are exempt from capital-gains taxes.
INVESTMENT #2: INVESTING IN A RENTAL HOME
Another great investment option when it comes to real estate is to purchase a property with an intent to rent out to tenants. As a landlord and owner, you’ll be responsible for paying the mortgage, property taxes, and maintenance costs, while your tenant will pay a fixed price that would, ideally, cover all of your costs and allow you to make positive cash flow in the form of profit. In addition, as your tenant pays down your mortgage, you’re building equity of your home in the longer run.
While you may find that mortgage rates might be higher for rental properties, as opposed to the primary residence owners, the rental enables an income generating opportunity and appreciation of the real estate asset in value over time.
According to RBC, three key benefits to owning a rental property are:
Opportunity to generate regular rental income while continuing to pay down debt and earn equity in your home.
Diversify your investments, which may reduce your overall risk as you aren’t putting all eggs in one basket when it comes to investing.
See a potential increase in the value of your home, in the form of capital appreciation.
INVESTMENT #3: FLIPPING A HOUSE FOR A PROFIT
House flipping owns its rise in popularity to Netflix and HGTV home improvement shows like Fixer Upper, Property Brothers, and Flip or Flop. These binge-worthy shows make home flipping fun, somewhat quick and easy, and extremely profitable, while the reality might paint a different picture.
The trick to making house flipping work and generate a handsome return on investment is to buy a home at an ultimate low - a rundown house that needs some cosmetic improvements and upgrades, but doesn't require major structural or costly renovation projects like a leaky basement or roofing revamp.
Speaking with a real estate agent ahead of time before investing will help to determine the home’s potential, and save you a lot of headache in the long run. At Only With, our real estate agents have helped many of our customers purchase homes in need of TLC with an intent to flip. Reach out to one of our agents to see if we currently have any available listings that might fit the category.
INVESTMENT #4: INVEST IN REITs
According to Nareit, a worldwide advocate for real estate investment trusts, REIT stands for Real Estate Investment Trust. It’s a company that owns and operates income-earning real estate, in a wide range of commercial properties, including offices, apartments, hospitals, and shopping centers.
Industry experts agree that REITs is great to enter the investment market. The way it works is that REITs allow any person to invest in portfolios of real estate assets the same way they invest in other industries. In turn, when you become a stockholder, you earn a share of the income produced through real estate investment – without actually having to buy, manage or finance the property.
As with any investment in stock and mutual funds, there aren't any guarantees of successful performance. It is best to start with a stable, conservative stock that shows a consistent history of paying dividends to its stockholders.
Jeff Rose, Certified Financial Planner and Contributor to Forbes, typically advise clients to stay away from non-traded REITs and buy only publicly-traded REITs instead. Canadian Investor, a hub of finance news and investment opportunities across Canada, provides a list of publicly-traded Canadian REITs that you can explore on their website.
To learn more about investing in real estate or to find an investment property that would best fit your needs, reach out to one of our Only With agents. Buying an investment property is quite different than buying a residential one. One requires finding a home and later determines the best ROI. Only With is an experienced and skilled negotiator in both fields.