What is Real Estate Investing?
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Discover the methodologyMany investors still rely on real estate to grow their investments. A rental investment can generate an average return of 5% to 7% per year.
But is it still worth investing in real estate? How much can this type of investment bring in? And what are the advantages and disadvantages?
Learn all about real estate investment options in Canada.
Keep in mind
Investing in real estate: what you should know
- Investing directly in real estate directly requires significant capital
- It is, however, possible to invest in real estate with a small budget thanks to funds
- The return on a real estate investment can be either income or capital gain.
- While often profitable, the real estate market can be a risky one
How to invest in real estate?
Investing in real estate in Quebec or Canada can be done directly or indirectly:
- Direct investment: it consists of buying a property in order to rent it or to resell it at a higher price
- Indirect investment: it consists of taking shares or investing in investment products in the real estate sector
It is, of course, possible to buy a property to rent it or to resell it at a higher price, but you can also invest in the real estate market through specific investments such as:
- Real estate investment trusts: investing in the securities of a trust allows you to receive the income generated by the trust's real estate investments.
- Real estate ETFs: you can also invest in exchange-traded funds that specialize in the securities of real estate companies
- Real estate mutual funds: mutual funds allow you to invest in a portfolio of real estate stocks
What are the different types of real estate investments?
There are different types of investments in real estate, including:
- Rental investment: this is by far the most frequently used method by investors trying to make a profit. But rental investment, or the purchase of a property to be rented, requires a lot of time and personal investment. It is not without risk. Profit will be realized on the rent received and possibly on the capital gain when the property is resold should it increases in value.
- Real estate flipping: this term refers to an investment operation of quickly buying and reselling a property to make money. This is possible in two ways. Either you carry out work on the property to increase its value or you bet on a fast-growing market. While this may seem like an attractive method, there is no guarantee that you will be able to sell your property at the expected price.
- Real Estate Investment Trusts (REITs): these are companies that use investors' money to buy, operate and sell real estate. As an individual, you can buy REITs on the stock market, just as you would buy a stock or an exchange-traded fund (ETF). This method of investment allows you to generate a regular income without having to worry about the administrative aspect of property management.
- Real estate investment groups: abbreviated as REIGs, these groups function like mutual funds for rental properties. The investor can purchase rental properties through the group in exchange for a percentage of the rent. REIG manages the administration of the property saving investors from this time-consuming, occasionally difficult step.
- Real estate mutual funds: FCP or mutual funds can be funds specific to real estate. They are funds that invest in real estate investment companies and real estate operating companies. They are intended for investors who do not have a lot of capital to invest.
- Real Estate Limited Partnerships (RELP) are similar to real estate investment groups but are formed for a limited time. Outside investors can finance the real estate project in exchange for ownership shares as limited partners. Here, the return will come from a regular income but especially from the resale of the property at a higher price.
Investing in real estate: what returns should I expect?
It is difficult to estimate the return on an investment in real estate with precision. It is influenced by many factors. For example, for a rental investment, your return depends on:
- The price paid to buy the building
- The down payment
- The income generated
- The current expenses
A real estate investment can yield an average 10% to 20% return per year, but be careful! This return will vary greatly from one investor to another.
Good to know
Example of return calculation: (Cashflow + capitalization + appreciation) / Down payment
($1,500 + $6,000 + $5,500) ÷ $60,000 = 21.66%
Investing in real estate in 2024: what you need to know
In order to invest in real estate intelligently and profitably, it is necessary to know the main principles of these investments:
- An investment according to the situation: the choice of a particular type of real estate investment will depend on each investor's profile and must take into account age, available cash, income, financial health, goals and personality.
- The types of investment properties: Your real estate investment can target different types of properties such as rental housing, commercial premises, land, retirement homes and many others. Common first investments in real estate are small multi-family dwellings.
- Location, location, location: the types of potential tenants will depend largely on where the property is located. The choice of the geographical location of a real estate investment is essential.
- Investing with a real strategy: defining your objectives and setting up a clear investment strategy are critical before investing in real estate. Clearly define your goals, your timeline and your capacities before going ahead.
Where to invest in real estate in Canada?
The geographic area in which you invest in real estate will have a big impact on the profitability of your investment. Generally speaking, the best places for this investment are:
- The suburbs of large cities: if real estate prices are constantly rising in large cities, this also means that demand is increasingly strong in the suburbs near these large cities. Investing in suburbs can therefore be interesting in the short and long term.
- Resort areas: it is also interesting to invest in real estate in a vacation property because this type of seasonal rental can be particularly profitable. In fact, the demand for vacation cottages has been exploding for several years, which makes it possible to rent these properties several months in advance while hoping to realize a capital gain upon resale.
| Geographic zone | Towns |
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| Cities in Ontario |
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| Other cities in Canada |
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Why invest in real estate?
There are various advantages to investing in real estate and we propose you discover here the most important of these assets:
- A good hedge against inflation: real estate tends to maintain the purchasing power of the capital invested in it by diverting some of the pressure of inflation onto tenants. They usually benefit from an appreciation of real estate capital in times of GDP growth.
- Ideal in a diversification strategy: if you are an investor who makes investments in other markets, real estate investment can help you diversify those investments and protect you against possible losses, given its low or even negative correlation with other major asset classes.
- An investment on credit: while buying stocks or other stock market assets requires you to invest the entire amount, a traditional real estate investment, apart from REITs, will only require you to invest a portion of the value of the property, the rest of which can be financed by a mortgage loan. Thus, the investment in real estate benefits from an interesting leverage effect.
What are the current real estate interest rates?
| Company | Variable rate | 10=year rate |
|---|---|---|
| BMO | 3.04% | 5.8% |
| BNC | N/A | 5.79% |
| CIBC | 3.75% | 6.09% |
| Desjardins | N/A | 5.39% |
| HSBC | N/A | 5.99% |
| RBC | 2.84% | 5.8% |
| Tangerine | N/A | 4.04% |
| TD | 3.04% | 5.6% |
Good to know
Quickly compare the best mortgage rates right here.
Is this the right time to invest in real estate?
Investing in real estate at the right time is tricky because the real estate market fluctuates. However, several indicators suggest that it is still time to take advantage of it:
- Interest rates are still low: interest rates on real estate loans remain very low at the moment, which encourages investors to borrow to buy a building or home. Count on between 2.49% and 7.45%.
- Rents that are rising: while interest rates are falling, rental prices in Canada and Quebec continue to rise and have even exceeded the value of homes in some markets in 2022. As a result, in many major cities, the monthly rent is equal to or greater than the monthly mortgage payment. Count on $1,600 to $3,600 for a two-bedroom apartment.
- An accessible investment: in the same way, real estate investment has become more accessible for individuals with little capital, with the possibility of putting a down payment of as little as 5% of the value of a property and having the rest financed by a mortgage.
- A rising market: more than two years into the covid-19 pandemic, real estate transactions and prices are rising.
Should I invest in rental real estate?
Investing in rental property is often the preferred solution for investors looking to generate a regular profit off of a property. But is this method as solid and profitable as it seems? Investing in rental property has its advantages but also its disadvantages.
Pros
- A quick return on investment: it is possible to obtain a return on investment from the first year in case the sum of the rents is higher than the amount of the monthly credit payment and the expenses.
- Tax reduction: it is also possible to reduce the annual tax bill by deducting certain costs and expenses related to the management and maintenance of the rented property. All costs related to work and repair and maintenance bills of the rented property are tax-deductible.
- Potential capital gain: similarly, the property you rent may increase in value and allow you to realize a capital gain over the long term.
Cons
- The management of tenants and income: the administrative part can quickly turn out to be complex and time-consuming for the owner who has to find his tenants and manage the income and risks.
- Property maintenance: if you are not a handyman or do not have the time to devote to the maintenance of your rental property, it is better to plan a monthly budget that will allow you to delegate these tasks.
Good to know
Unsure how profitable a specific rental property could be? Our rental property calculator will help you quickly estimate your potential return on investment.
How to invest in real estate with little money?
Investors who are interested in reselling or renting property generally need a down payment of at least 20% of the purchase price to get started. Fortunately, there are solutions now for investors with smaller sums.
- Real estate investment trusts: by investing in a REIT or a real estate investment trust, you can receive income from the management of real estate properties. These investments do not require a lot of start-up capital and these REITs generally distribute 70% to 95% of their income to their investors. You can get started with a real estate trust investment with as little as $1,000.
- Equity crowdfunding: consists of investing in an equity crowdfunding campaign for a real estate company. Essentially you buy a share of a real estate project and count on it turning a profit later. You will still have to spend a minimum of several thousand dollars for this type of investment.
- ETFs or exchange-traded funds: there are traded REIT funds that offer an interesting diversification to investors. Some funds hold in excess of one hundred real estate companies. They allow you to receive regular dividends (quarterly or monthly) in exchange for relatively low management fees. ETFs also have the advantage of being accessible with small amounts of money and less than $1,000.
How much should I invest in real estate?
Finally, if you wish to invest in real estate, the amount you will have to spend will depend on your strategy and the type of investment you will choose.
- Rental property purchase: If you want to buy a property to rent it out, you need an amount corresponding to the value of the property or the amount needed to obtain a mortgage, i.e. 5 and 20% of the property's value.
- Indirect real estate investment: If you want to invest in real estate more indirectly, you will only need a few hundred or a few thousand dollars to invest in real estate mutual funds or a trust.
Is investing in real estate without credit a good idea?
While a mortgage or loan is the most common way to finance a real estate investment, banks require a substantial down payment for this. If you do not have this budget, it is possible to finance your investment property in other ways:
- By using the equity in your home, i.e. the part of your main property that is no longer subject to a loan.
- By using other people's RRSPs and more specifically, a self-directed RRSP held by a third party. This third party can lend you cash to finance your investment in exchange for interest.
- By creating a partnership: as we will see in more detail below, it is also possible to invest in real estate in partnership with other people.
- By applying for a private mortgage: while private lenders are more flexible than banks and lending institutions, their interest rates are also higher and you will have to take this into account when calculating the profitability of your investment.
Investing in real estate together: is it a good idea?
Joint investment in real estate is possible and easy. It simply refers to multiple investors buying a building collectively. Profits are shared among the different partners.
But this type of investment is relatively heavy in management and decision-making. Carefully choose the people with whom you will be dealing.
The main advantages of joint investment in real estate are:
Pros
- More capital: going in on a project with several people, means more money and the possibility of different and larger projects
- A more accessible loan: thanks to the guarantees of the different borrowers, it is easier to obtain the financing of the purchase from a bank.
Cons
- More complex management: you must collectively manage your real estate investments and homes, which makes decision-making more complex.
- Lower returns: you will have to split the profits generated will also be shared between the different investors.
Our opinion on real estate investment
Investing in real estate is an excellent way to diversify your investments. However, it is not for everyone and most often requires a substantial amount of capital.
There are more simple and affordable ways to benefit from the stability and performance of the real estate market through real estate funds or trusts.
Alternatives to investing in real estate
In addition to your real estate investment, there are other interesting and fruitful investment solutions available today, including:
- Stock market: investing in shares on the stock market remains one of the most profitable if you choose your stocks carefully. You can also invest in shares of real estate companies.
- Cryptocurrencies: these digital, decentralized currencies are becoming incredibly popular with individual investors. Their volatility can mean impressive returns or dramatic losses.
- Mutual funds and ETFs: apart from real estate funds, there are many other mutual funds or funds listed on the stock exchange that allow you to invest in other interesting sectors such as technology or health.
