What everyone should know before making an investment

Real estate remains an attractive investment here in Canada, but having all of the information at hand before making a move is essential. Using the services of a financial advisor may not be the best option because, as recent controversies have revealed, many Canadian advisors face sales pressures that force them to recommend investments that are not always in the best interests of their clients.

“For an investor who does want to allocate to real estate and not use an advisor, they have the option to buy a property and rent it out; purchase, renovate and resell; trade in real estate; or buy publicly traded REITs,” says George Lawton, CPA, CA, CEO, North American Home Finance Inc. “If they do want to get an advisor, they can buy a Canadian REIT index fund, mutual fund or syndicated mortgages through a professional or self-directed RSP account. With that account they can also lend money out to other real estate owners just like the bank does.”
Although historically popular, the buy-to-rent strategy is proving increasingly challenging in the current market. Home values have risen sharply over the last 5 – 10 years, and it’s now gotten to the point where it’s difficult to make the numbers work. “The CMHC eliminated the high ratio financing option for residential properties for investors 4 – 5 years ago and it’s now difficult for investors to affordably buy residential properties and realize positive cash flows,” Lawton says. “People don’t want to buy a property and keep feeding it every month out of their own income stream.”

In order to get some positive real estate returns and good consistent income, more investors are accessing large developments and commercial property investments via publicly traded REITs. “The bigger REITs have strong balance sheets and provide income but, because of their maturity in the markets, the yields have come down,” Lawton says. “In the current environment, many individuals are uncomfortable with the volatility associated with publicly traded REITs. Uncertainty around market timing is making it difficult for people to feel they’ve made the right move at the right time.”

In theory, syndicated mortgages and limited partnerships are good options for people looking to access commercial real estate or development projects. But, because they tend to be offered by small, companies, as opposed to large publicly traded companies with large balance sheets, they’ve face many issues in recent times. “It can be like rolling the dice: it’s hard to know if an investment is good and if the company has the right strategy to deal with hurdles,” Lawton says. “Because these companies are smaller than large publicly traded REITs, they don’t have the liquidity and balance sheet to weather business cycles in the same way.”

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