How To Invest In Real Estate

Rental Real Estate

Like purchasing your own residence, buying rental real estate for income works best when you take a long-term approach.  It requires time commitment, experience and patience.

Buying a property in a good, growing area with high demand for rental housing and making the initial improvements to make it a quality rental is the most challenging.

Related: 4 Hidden Costs When Buying And Selling Your House

It takes some hard work and research to acquire the best investment.  Look for a reputable, experienced agent familiar with investment real estate.

Buy a cash flow–positive property to earn decent returns.  You want a nice boring property rented as long as possible to decent credit profile tenants.

To be profitable, at least in the beginning, you’ll need to manage the property yourself instead of using a management company that can take a huge bite out of your cash flow.

Being aware of your local by-laws and complying with building codes is also critical to becoming successful as a rental property investor.

Once the property is paid off, it will provide a steady income stream for as long as you’re able to care for the property and your tenants.

Related: How To Pick The Perfect Mortgage

If you would like to invest in real estate without the hassle of being a landlord there are several options.

Debt investments

Private MortgageIf you would prefer to not own property directly, an investment in mortgages can be arranged through a mortgage broker who, for a fee, acts as an intermediary between the borrower and the lender of the mortgage money.

The ability to have collateral tied directly to a real asset can make this an attractive option.

If a mortgage investment is arranged privately between a borrower and lender, legal assistance may be necessary to properly prepare and register the mortgage documents.

Mortgage-Backed SecuritiesAn MBS is a fixed income investment representing ownership interest in a pool of mortgages fully insured by the National Housing Act.

They are usually the highest yielding AAA fixed income investment available to retail investors with the same high level of safety of any government guaranteed security.

RelatedDoes A Reverse Mortgage Make Sense For Seniors?

Predictable cash flow of monthly interest and principal payments make them especially of interest to retirees.

Equity investments

Limited Partnerships: You can find opportunities for participation in real estate syndicates or limited partnerships through private sales forces.  They involve a pooling of resources with like-minded individuals and partnering up with a third party organizer or promoter who makes the purchasing, managing and selling decisions.

Investment can be in land development or existing properties such as apartment buildings and vacation properties.

A prospectus or offering memorandum will outline the details of the investment.  Good research and due diligence are imperative before investing.  Take a good look at how the deal is structured and be wary of unrealistic expectations of profit.

Real Estate Investment TrustsREITs are trusts that own and develop property and earn rental income.

REITs can be purchased though a discount brokerage or directly from the company administering the trust, like stocks.

Related: Are REITs Worth A Look For Yield Hungry Investors?

What makes them an attractive way to invest are the high yields on the dividend payments – typically paid monthly.

They are a way to invest in a large number of geographically diversified real estate investments such as residential apartment blocks, hotels, office towers, shopping malls and seniors retirement homes.

Some examples include:

  • First Capital Realty (FCR) – shopping centres
  • Boardwalk REIT (BEL.UN) – multi-family residential units
  • Allied Properties REIT (AP.UN) – office towers
  • Chartwell Retirement Residences REIT (CSH.UN) – retirement units
  • Dundee Industrial REIT (DIR.UN) – industrial complexes

REIT ETFsThese ETFs hold multiple REITs and track the performance of a real estate equity index.  They may hold properties is the US and globally as well as in Canada.

Some examples are:

  • BMO Equal Weight REIT Index ETF
  • iShares S&P/TSX Capped REIT Index
  • Vanguard FTSE Canadian Capped REIT Index ETF

Why Invest In Real Estate?

Many people have a significant portion of their net worth invested in their homes.  Therefore, additional real estate exposure may not be for everyone.

There are some risks involved when you invest in real estate – some are obvious, and some are not.  Real estate development, private real estate funding, and fixer uppers have much higher risk profiles.

Real estate does, however, offer the ability to diversify into an area often under-served in many investors’ portfolios.


6 Responses to How To Invest In Real Estate

  1. At my firm, we are strong believers in the long term value of real estate in a portfolio. We generally don’t consider principal residence to be part of the client’s investment portfolio in determining the appropriate weighting to real estate. We often find clients who invest in rental properties themselves poorly equipped to handle the associated work.

    Mutual Funds cannot own real estate directly but they can invest in companies that invest in real estate related businesses. Indirect but a way to participate in real estate if you are a mutual fund investor.

    There is no restriction on Segregated Funds owning real estate. We use the Great-West Life and London Life funds, both managed by GWL Realty Advisors. Those funds directly own and manage buildings.

    Since the funds’ unit values are driven by periodic building valuations and net rents versus the daily market value of a basket of stocks, the volatity is low and correlation with equities is low.

    As with all real estate, liquidity is an issue and these funds were closed to redemptions in late 2008 for 18-24 months. The funds did reasonably well during the 2008-09 meltdown, but it was frustrating to many investors that they weren’t able to get at their funds. Note that the companies continued to make RRIF payments. Those with a long-term view and an appropriate weighting were less concerned and most clients stayed invested in the fund after the moratorium was lifted.

  2. @Todd Roberts: Thank you for your comments and the inclusion of other real estate investment options although the MERs of this category of mutual funds seem to be quite high – up to 3-3.5% +. However, I believe that people should be aware of their options in order to make good decisions.

    • Agreed on the mutual fund MERs. The real estate seg funds we use have MERs in the 2.03% to 3.24% range. But ultimately, net returns are what matters and they have been quite good.

  3. Funny you should talk about this. I invested in a rental property where I lived in one half and rented the other.

    I started this 12 years ago and the property is paid off but I am now living in a second house with a reasonable mortgage.

    When things work well it is good but when shit hits the fan its shit.

    Having the right tenants is key but having the right neighbourhood, the right neighbours, the right alderman, are you catching my drift?

    I do have the option of selling and getting out of it but I am in the twilight of my working years and being a landlord may end up being a good supplement income. Time will tell.

    Happy investing

  4. My favorite real estate investments are REITs. I think there is a lot of interest, but the problem is that most do not fully understand it (as with any other asset class). When it comes to real estate as an investment it is an asset, owning one becomes a liability and home equity is the biggest middle class myth out there. The sooner you treat your owned real estate as a liability the faster you learn how to make money in real estate.

  5. Great article! As a financial planner I invest in real estate indirectly though mutual funds, I have yet to bite the bullet and actually purchase a rental property. Some of my friends have rental properties, some of them do very well and some are sitting with empty apartments. It’s just a bit too risky for my liking – not a CFPs have high risk portfolios. Have a good weekend.

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