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Looking to start investing in real estate? Increasing dissatisfaction with the typical 9 to 5 corporate job along with the rising price of living has caused more people to seek financial freedom through investments and “side hustles” now than ever before. Although investing in real estate comes with many benefits like increasing wealth and possible financial freedom, most find it daunting.
The complex financial and legal terminology, calculations of compound interest, appreciation, and mortgage rates along with the complexities of being a landlord can scare any potential investor. But you shouldn’t let this ruin your chances at growing your wealth and finding financial freedom.
This article will provide a comprehensive introduction to investing in real estate. By the end of this article, you will be knowledgeable on the basics of real estate investing and will be able to make an informed decision on whether you are ready to invest in real estate.
Many people who consider investing in real estate typically wonder whether it’s worth it in the first place, or if they should invest their wealth in other ventures like a mutual fund or the stock market. Little do they know, real estate is one of the safest, risk-free ways to earn money.
As an investor, you can build home equity and wealth based on the amount of appreciation your property gains and any other cash flow coming from your rental income. Rental income is the most constant form of income and usually covers your mortgage payments. Appreciation, the increase in the value of your property, increases wealth and home equity much more than rental income, but typically takes years to gain. This isn’t the case in Canada’s current housing market.
Currently, the Canadian housing market is booming due to low-interest rates and limited inventory. This has resulted in residential and commercial properties increasing in appreciation much faster, whereas appreciation would have taken years to increase. It’s now happening on a month-to-month basis in almost all regions across Canada. Overall, even amid the COVID-19 pandemic, this is the best time to invest because investors can buy a property and pay less on mortgage payments all the while their property increases in value.
While it may be a great time and idea to invest in real estate, it is often easier said than done. There are many different factors that you should consider before investing in real estate. Every potential investor should consider their goals, current financial situation and the current market conditions. These tips will influence your strategy and help set you up for success:
The first step of real estate investing is determining your goals. Don’t get into it blindly. An investor’s goals should outline what they want out of their investment and guide their next steps. Despite this, many people set very general goals like “I hope to grow my investment.” Consider setting S.M.A.R.T. goals instead. These goals are specific, measurable, attainable, relevant and timed. S.M.A.R.T. goals will help you get a better understanding of what you want out of real estate investing and how you can make that happen.
Let’s revise the goal “I hope to grow my investment” using the S.M.A.R.T. goals criteria. This goal could be “Within the first two years of buying a rental unit, I hope to have a positive cash flow of at least $500 a month.” This goal is specific, measurable, attainable, relevant and timed. All in all, it’s a great goal!
Jumping into investment real estate can be difficult, especially if you have little knowledge of the topic, but again, that doesn’t mean it’s impossible. We recommend speaking with an experienced real estate investor to learn more about the realities of investing and asking about any advice they have to offer.
Someone with years of experience investing in real estate is likely to have an abundance of investment knowledge. They can share advice on all aspects of investing where it is purchasing an initial investment property and expanding your financial portfolio. A seasoned investor’s lived experience will be invaluable to helping you learn the ins and outs of real estate investing. Their help may even save you from having to undergo as many trials and tribulations during your initial investment.
The current housing market trends play an important role in real estate investment because it determines how well an investment will do and how quickly. This is why every person considering real estate investing should get to know the housing market, its history, and any expected changes.
One of the best ways to familiarize yourself with the housing market is by evaluating historical data alongside current trends. Real estate is considered to be a cyclical industry because its demand and supply are impacted by economic trends. Assessing data and seeing how the market has changed over several decades will help you understand the market better.
Speaking to real estate brokers, investors or realtors will also provide you with invaluable information on the housing market. They will have the most up-to-date information on the market and will be able to forewarn you of any expected changes or downturns.
In real estate investments, a target audience means the demographic that an investor hopes to attract to their rental property and sign as tenants. This plays an important role in the location and type of property that they purchase.
For example, an investor that prefers working professionals will need to understand their values and demographics in order to appeal to them. Working professionals typically work long hours in a city or urban area with plentiful jobs. They may also have recently graduated from college or university and have not settled down or started a family yet. Investors who would like to appeal to working professionals should choose a small condominium or apartment unit near an urban centre. The unit’s proximity to offices could attract many working professionals who don’t need a large amount of space.
You can determine what a property and location need to attract your preferred demographic by simply evaluating their lifestyle and values.
Before searching for properties to purchase, a potential investor should determine what location that they would like to invest in. While some cities like Toronto and Vancouver are growing hubs of real estate, there are many other areas in Canada that have great potential for successful real estate investments. We encourage you to explore your options before settling on a popular location or one that is close to your home.
When considering locations, every potential investor should complete a market analysis. A market analysis should assess details like the economic, employment, educational and environmental conditions of the area to help determine whether your investment will thrive or be vulnerable in a particular location. For example, properties in a location with population, employment and economic growth will likely increase in appreciation much more in areas that don’t. The information revealed in a market analysis can help protect your investment for the future.
After you have determined your target audience and narrowed down the desired location of your investment property, it is time to find an actual property to purchase. This can be a stressful task for any beginner investor, but it doesn’t have to be.
The first and most important quality to look for in a property is whether it has appreciation potential. As mentioned previously, appreciation is one of the most important factors in ensuring that your investment is a success. Look for a property that will likely increase in value over time. This could be a cheap apartment in an up-and-coming neighbourhood or a large condo in Toronto.
Properties that need minor renovations or cosmetic changes have great potential for increasing their appreciation value too. Don’t let the cost of these changes deter you from investing either; the New Residential Rental Property Rebate (NRRP Rebate) can help new investors save money on their renovations. We’ll touch more on that later.
Buying an investment property can be an overwhelming task, especially if you are concerned about how it will affect your current financial situation. Little do people know, they are sitting on a pile of cash in their primary residence which can make investing easier.
Home equity, which is the difference between the value of your home and how much you owe on your mortgage, can be taken out as a home equity loan and used for a down payment on an investment property. For instance, if you bought your primary residence for $325,000 and owe $200,000 on your mortgage, you will have $125,000 in home equity.
Up to 80% of your home equity can be borrowed at rates as low as 1.5%, allowing you to invest in real estate easier. A home equity loan is also tax-deductible, meaning that it can reduce your income tax. Overall, a home equity loan is a great way to use your assets to expand your financial portfolio.
Real estate investing can feel overwhelming and complicated, especially if a new investor is starting this journey by themselves. Rather than trying to rely on yourself, seek some help from an industry expert.
There are many professional real estate investors who offer their services to help new investors get off on the right foot. They can act as mentors and help guide you through the investment process. Many mentoring services have lead their members to great success, including Connect.ca’s Inner Circle which has 36 certified millionaires taking part.
Some organizations like the Professional Real Estate Investors Group of Canada (PREIG) can also provide guidance to new investors. Their various training sessions on financing a home, being a landlord, current market trends and more can be invaluable for those looking to invest in real estate.
One of the most important decisions you need to make while investing is whether you would like to invest in residential or commercial real estate. Each path comes with its own benefits and challenges, all of which should be carefully considered against your goals, risk tolerance, capital and timeframe. This will help you determine what investment strategy is the best fit for you.
There are two categories of commercial real estate: multi-unit residences or commercial buildings like office buildings, warehouses and retail spaces. While both are considered commercial real estate, they can differ greatly.
Properties with five or more rental units designed for living spaces can be considered commercial real estate. This means that investors who choose to buy condos, duplexes and quadruplexes are considered commercial property. In contrast, office buildings, warehouses and retail spaces are the most common commercial real estate buildings and they typically host a business of some sort.
Commercial real estate is known to have longer leases than residential. Residential properties typically have leases that last from anywhere from six to twelve months, whereas commercial properties’ leases can last years. In fact, some commercial properties can have leases that last anywhere from five to ten years.
Commercial real estate’s long-term leases can help an investor protect their investment for a relatively long period of time. Long-term leases can ensure that tenants remain longer, thus maintaining cash flow and lowering vacancy rates. This is much more secure than residential which can often have quick turnovers in tenants.
Return on investment (ROI) is a ratio between net income and investment. This ratio is used to determine how much money an investor receives after all the necessary payments have been deducted. This is determined by a simple equation:
ROI = (Investment gain - Investment cost) / Cost of investment
Investors have found that, traditionally, commercial real estate has the highest returns on investment. According to Matt Larson, a real estate investor, “Commercial properties typically have an annual return of the purchase price between 6% and 12%.” This is much higher than residential properties’ 1-4%. As a result, commercial property’s ROI is higher.
A commercial real estate investor can save a lot of money on taxes compared to those who have invested in residential properties. This is because commercial investors can take advantage of a double net lease (NN) or a triple net lease (NNN).
An NN lease and an NNN lease are when a tenant rents an entire commercial property. In a double net lease, tenants pay for the rent and two other incidentals - typically the property taxes and insurance. In a triple net lease, tenants are responsible for all costs except any structural repairs. This means that landlords do not need to pay property taxes on their commercial property.
Much like families, residential properties differ greatly. Condominiums are popular residential properties in urban areas because of their compact size. Single-family homes are private homes that hold one family and have direct access to a street. Vacation homes are typically secondary residences located in a tourist hotspot like Muskoka. These properties are great getaways for families and are typically rented out for days or weeks at a time.
While these properties differ in their sizes, location, and purpose, they are all categorized as residential real estate and reap much of the same benefits, including a lower cost of investment.
Unlike those buying a primary residence, investors need to pay all HST upfront when purchasing an investment property. This can cause a property to cost much more than originally anticipated. Thankfully, beginner investors can take advantage of the New Residential Rental Property Rebate (NRRP Rebate) to lessen their financial burden.
The NRRP Rebate is an HST rebate that is available for investors who have bought newly built rental properties or have completed major renovations on their rental property. This rebate will pay back the majority of HST as long as investors apply for the NRRP Rebate within two years and have tenants that have signed a lease for one year. Few investors take advantage of this rebate, but it can greatly alleviate some of the costs associated with buying an investment property. Most investors receive a maximum $24,000 HST rebate when they apply for the NRRP Rebate.
The cost to invest in residential property is noticeably less than commercial real estate. Commercial real estate typically is priced much higher than residential, resulting in investors needing to put down larger initial down payments. It is much more viable for the average person to save for a residential property, even if they need to place a 20% down payment on the property.
Residential real estate offers a lower cost of entry to investments. This can make it easier for those who are hoping to diversify their portfolio without as much financial risk.
Those who invest in residential real estate can look forward to many potential tenants. This is because more people like working professionals, students, immigrants and those looking to downsize choose to rent out residential properties rather than buy a home for themselves. This is especially true in Canada’s current housing market. With skyrocketing housing prices, more people are staying in the rental market longer. This benefits investors and landlords because they have more potential tenants and they can be selective as to who they rent their property to.
When you buy a rental property, you simultaneously become a landlord. There are many responsibilities that are associated with being a landlord like finding good tenants, managing properties and completing any necessary maintenance. Handling these responsibilities can take many hours a week depending on the number of properties and tenants that a landlord has. For most investors with another full-time job, being a landlord is a time-consuming responsibility.
If you are too busy to take on the responsibilities of being a landlord or simply don’t want to, consider hiring a property management company. Property management companies handle the operations, maintenance and administration associated with a rental property. Their tasks can include anything from balancing budgets, collecting rent, recruiting tenants or fixing broken utilities.
Hiring a property manager may be a great option for those who are simply looking to make a profit off of their real estate investment, not become a landlord. This route can reduce the stress and time commitments for an investor, but the fees associated with hiring a property manager could reduce the amount of profit you make. Carefully weigh the pros and cons of both options before deciding whether to become a landlord or hire one.
Real estate investment trusts (REITs) are companies that own or finance real estate across a range of income-producing properties like retail stores, shopping malls, and industrial real estate. These companies provide an investment opportunity, much like a mutual fund, and allow anyone to invest in a portfolio of real estate assets without needing to purchase a rental property or manage it. In a sense, REITs are like property managers for the hundreds or thousands of people who invest in them.
This is how it works: Investors place a small amount of money in REITs to invest in that company’s portfolio of real estate properties. As rental income and appreciation are earned from those properties, REITs pay out at least 90% of it to their shareholders in the form of dividends. In turn, the shareholders pay income taxes on those dividends.
This seems simple, but not just any company can be a real estate investment trust. Companies need to meet a number of criteria to qualify as REITs including being a publicly-traded unit trust, 75% of their holds must be in Canada, 75% of their annual revenue must be from their properties, and they need to meet the tests outlined in the Income Tax Act of Canada. This ensures that investors’ money is protected.
First, REITs are much easier to invest in because of their lower point of entry. Rather than having to save up to place a down payment on an investment property (a feat that may be impossible for many), an individual can invest in REITs as they would a mutual fund. This investment is significantly lower than a down payment and a mortgage, making this route more viable for those with fewer savings or disposable income.
Just like any rental property, REITs’ properties will bring in steady rental income and gain capital appreciation over time. This makes REITs a relatively safe investment for those looking to invest.
Real estate investment trusts can also help safeguard your financial investments, increase your returns and better your financial portfolio. REITs differ greatly in comparison to other investment opportunities. This makes them great portfolio diversifiers. An investor who invests in REITs and other various investments can trust that they aren’t putting all of their money in one place - a risky move if the market, business or stock market experiences a downturn.
In order to find success in your real estate investment, you should make the most out of your investment. Ryan Coyle, seasoned real estate investor and co-founder of Connect.ca, has learned how to do just that.
When Coyle started investing 20 years ago, he focused on leveraging his asset base and buying more real estate rather than cash flow. By following the guidelines of the Multiplier Effect and refinancing his properties that have grown in appreciation and compound interest, he has been able to buy a staggering 35 properties that bring him to a portfolio of $19.5 million.
After finding success, Coyle has shared his secret to expanding his property portfolio: don’t be afraid of a negative cash flow. Unlike most other investors and gurus, Coyle stands firm that “Capital appreciation is the most important thing.” While positive cash flow is most people’s goal when investing in real estate, capital appreciation can help expand wealth.
Beginner investors shouldn’t be scared of a negative cash flow. Rather, they should see it as a potential opportunity. As their assets grow, they can refinance their properties and use that money to expand their portfolio. More properties will gain appreciation faster than one, thus increasing an investor’s wealth. Negative cash flow can even reduce income taxes, so they’ll have more money to spare.
Overall, there are many ways that you can make the most out of your investment as a beginner. All you need is passion, strategy, and some extra help from seasoned investors. As Coyle says, “Don’t get cause up in analysis paralysis, it’s important to get out there and do it.”
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