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How to Invest In Real Estate: 10 Ways to Make Money In the Canadian Real Estate Market

How to Invest In Real Estate: 10 Ways to Make Money In the Canadian Real Estate Market

Current property prices and real estate values aside, real estate investing in Canada has proven to be a solid investment for generations. But for many, the question of how to invest in real estate is a tricky one. In this article, I’ll show you ten different ways to make money in the real estate market, and I’ll let you know whether it’s better to invest in real estate or stocks. But first, let’s take a closer look at what real estate investing is all about.

What Is Real Estate Investing?

Real estate investing refers to income generated from buildings or land or a combination of the two. When Canadians consider real estate investing, they usually think about owning a rental property. That is, after all, how most Canadians invest in real estate.

But there are several ways you can participate in the Canadian real estate market, and you don’t even need to own physical property.

Benefits of Real Estate Investing

If your investment portfolio is limited to stocks and bonds, or ETFs, there are advantages to adding real estate as an asset class. We’ll get into the various ways you can do that below, but first, here’s a quick list of key benefits to real estate investing:

  • Historical returns have been solid in the Canadian real estate market
  • The asset class is an excellent complement to equities
  • Regular income stream (rental income)
  • Long-term capital appreciation
  • Acts as a hedge against inflation – as prices rise, so does the value of real estate
  • Tax-efficient (capital gains)
  • Increased returns through leveraging (mortgage)

10 Ways to Invest In Real Estate

The following is a list of ten different ways investors can add Canadian real estate to their investment portfolio. Some require a significant time investment, while others are more passive. Some require large amounts of capital, and others let you get started with only a few dollars.

1. Buy a Principal Residence

Some believe that your principal residence, while an asset, should not be considered an investment. The main reason is that it’s not cash flow producing. No matter where you stand on the issue, the house you live in has the potential to increase in value substantially over the long term, especially if you bought in an appreciating housing market.

2. House Hacking

Perhaps the easiest way to own an income property is by converting your primary residence into an income-producing real estate investment. There are several ways you can do this. House hacking is a popular one. House hacking involves renting out portions of your primary residence, like a bedroom or a basement suite, while you continue to live in the house.

The income generated from the rental unit(s) helps to offset the cost of your mortgage. It’s a great way to increase your cash flow and grow your net worth. House hacking can include short-term rentals, such as Airbnb, but I’ll get into that a little later.

3. Convert Your Primary Residence Into a Rental Property

If house hacking doesn’t interest you, you could buy or rent a new house and turn your existing home into a rental property. There are a few advantages to doing this. Because you already own the home, you don’t have the expense of buying a rental property from scratch. Most lenders require a down payment of 25% or more on rental properties. Not only that, but you have to find a suitable house and go through the mortgage approval process. It’s a lot of work.

However, if you’re planning to do this, make sure that your existing home is suitable as a rental property. Can it produce a positive cash flow? In other words, will the monthly rental income be enough to cover the mortgage, property taxes, and any other related expenses?

Also, is it in the right neighbourhood? Is there a demand for rental properties where you live? Find out what the vacancy rates are and your chances of the home always being occupied. A rental house with no tenants can quickly become a burden.

4. Purchase a Rental Property

If you have enough cash available, you may decide to stay where you are and purchase a rental property instead. The upfront cost will be much higher, but you can pick and choose a home that is well suited as a rental. Ideally, you want to buy in an appreciating market, where the economy is strong, and homes continually increase in value.

You want a home that’s been well maintained. Cosmetic upgrades are ok, but you don’t want to replace the roof, windows, or other big-ticket items any time soon. Before you buy, make sure you have the home inspected by a professional.

No matter how you acquire a rental property, you need to make sure it generates positive cash flow. In other words, the money coming in from rent exceeds your total housing costs, including mortgage payment, property taxes, utilities (if applicable), and regular maintenance.

Lastly, do your research to ensure there’s a substantial market for rental units in the area. What are the vacancy rates? Is there an excess supply, which will drive down demand? Strong market conditions mean a surplus of potential tenants and higher rental rates.

5. Flip a Residential Property

If you’ve spent any time watching HGTV, you’re familiar with what it means to “flip” a home. House flippers invest in real estate by purchasing an investment property with upside potential, injecting large amounts of cash to improve the property’s value, and then selling for a profit shortly after that. Some house flippers will choose to keep the home as a rental, but usually, the goal is to get in and get out quickly.

House flipping can be risky, but if done correctly, it offers a high reward. To succeed, you should have specialized knowledge of the local real estate market (or consult with someone who does) and plenty of experience in renovating homes. While some house flippers can get by only making cosmetic upgrades (interior/exterior paint, landscaping, staging), many embark on expensive and time-consuming structural upgrades to a home in hopes of cashing in.

The desired outcome of most house flipping scenarios is to make a significant profit very quickly. It’s the only reason for taking so much risk because the downsides can be extreme. Here are some of the potential downsides to house flipping:

  • Large upfront capital investment
  • Unanticipated expenses can derail plans
  • Tax implications that eat into profit
  • Personal stress
  • Time delays result in holding costs
  • Inability to sell at the right price

6. Airbnb

The rise of mobile technology has created a wave of new real estate investors across the globe. Traveler’s now have the ability to find customized, affordable accommodations when they travel by booking with Airbnb. If you own a house or an apartment with extra space, or an entire house for that matter, you can make it available as a short-term rental property on Airbnb.

Advertise your property on the app, and Airbnb users traveling in your area can book your spare bedroom, apartment, or home during their stay. This might be the most flexible real estate investment out there. You choose when your property is available, and you get to set your prices. There’s no need to advertise because Airbnb does that for you on their global platform. Some people dedicate entire properties to renting through Airbnb.

If you’re thinking about using Airbnb as a real estate investment, there are some things you should know.

  1. Listing your property is free. Airbnb will only take their cut from the payout you receive after a successful rental.
  1. You set your price. You’ll get the best rates if your property is in a desirable location, such as a major city or a vacation hotspot. Of course, the nicer your place, the more money you can charge. Just like hotels, you can charge more on weekends than weeknights.
  1. It’s flexible. You decide when and how often to list your property. Airbnb can be anything you want it to be, from a real estate investment standpoint. You can use it to make a few hundred extra dollars a month, or if you’re serious and own several properties, it could provide a full-time income.
  1. Get paid after check-in. In case you’re wondering, Airbnb pays hosts after the guest checks in. This reminds me of another benefit to real estate investing with Airbnb. You don’t have to worry about collecting payment from your customers; Airbnb does it for you right on the app. While they do take a cut, this eliminates a major headache for the host.

A note of caution about Airbnb: while few people saw it coming, the COVID-19 pandemic had a catastrophic effect on the global travel industry. With domestic and international travel at a standstill for over a year, Airbnb owners were among those who lost a lot of money when reservations dried up overnight. Even though there is hope that we are coming out of the worst of the pandemic, it’s proof that no industry or investment is immune to failure.

7. Purchase Farmland

You may be surprised to know that Bill Gates is the largest private farmland owner in the United States, with approximately 300,000 acres in his portfolio. But why is Bill Gates buying so much farmland? Because it’s an excellent investment, of course. Across much of North America, the value of farmland is very stable, with plenty of growth potential. Of course, you don’t have to own 300,000 acres for farmland to be a great investment.

Many rural Canadian landowners lease their land out to neighbouring farmers who use it to grow crops or as pasture for their animals. This makes for an ideal form of passive income. You can also choose to buy and hold farmland over the long-term to sell it for a tidy profit down the road.

8. Commercial Real Estate

A less common but highly profitable way to invest in real estate is through commercial real estate ownership. Commercial real estate can be anything from a single unit retail storefront to large office buildings and shopping malls. Businesses rent space to operate retail stores, restaurants, offices, and manufacturing facilities with commercial real estate.

The upsides to commercial real estate investing are apparent: higher rental margins, the stability of long-term leases, and the ability to diversify. On the downside, commercial properties require a lot of maintenance (which is very expensive) and a significant time commitment. There’s also the liability aspect of owning buildings often used by the public.

Of course, commercial real estate is costly to own, making it difficult for individual investors to get involved. You either need to have considerable cash resources or be well-financed. If you find commercial real estate intriguing but lack the resources, you may want to consider REIT investing instead.

9. Invest In REITs

Real Estate Investment Trusts, or REITs, are pooled investments that let you buy and sell real estate on the stock market. The advantage of holding REITs in your portfolio is that it enables you to benefit from the growth of the real estate market without the costly overhead and hassle of buying individual properties. With a REIT, you can participate in owning hundreds of residential and commercial addresses around Canada and the US. For better diversification, you can build a portfolio of REITs.

Other REIT Benefits:

  • RRSP/TFSA eligible
  • REITs pay dividend income, which is tax-efficient
  • Gain industry-specific exposure
  • Geographic diversification

10. Invest In REIT ETFs

Instead of traditional REITs, you can now opt for REIT ETFs. An ETF is an exchange-traded fund that holds a basket of stocks and trades like a stock on the exchange. ETFs are passive investments, which means that the fund manager is trying to replicate the performance of an underlying market index rather than beat it. This hands-off management style means that ETF fees are much lower than what you would pay for other types of investments, like equity mutual funds, for example.

Where to Buy REITs and REIT ETFs

Whether you’re buying individual REITs or REIT ETFs, the least expensive and easiest way to do it is through an online discount brokerage, like Questrade or Wealthsimple Trade. We’re big fans of both platforms here at MapleMoney because neither charges a commission fee for ETF purchases. So, you can buy a REIT ETF at no cost, aside from the small management fee. For more information on REITs, check out our list of the best REITs in Canada.

Should I invest in Real Estate or Buy Stocks?

Investors seem to be on one side of the fence or the other when investing in real estate vs. investing in the stock market. I’ve always preferred stocks for their simplicity. But there are thousands of Canadians who have become very wealthy by focusing primarily on real estate investing.

If you’re wondering which asset class has offered better historical returns, the short answer would be the stock market. But that doesn’t tell the entire story. Because it’s much easier to buy and sell stock, those investors can tend to let their emotions impact their decision making ability, which can lead to less than stellar results.

For example, if the stock market drops, a panicked investor may decide to sell, incurring a loss. Real estate investors on the other hand, lacking liquidity, will most often stay invested, and be willing to ride out the normal, short-term fluctuations that come and go.

Using Leverage with Real Estate Investing

Real estate investors can use leverage to increase their returns. By borrowing to invest, you gain access to additional capital without having to front it yourself. There are risks to using leverage, but they diminish over the long-term. Here’s a simple example of how leverage can make real estate investing more attractive than stocks.

I have $50,000 to invest in stock, my returns will be based upon my principal investment of $50,000. However, by taking out a mortgage, the same $50,000 could be used as a down payment to purchase a $250,000 investment property.

In such a scenario, the real estate investor is able to earn rental income and capital growth using $200,000 of borrowed funds on top of their original $50,000 investment. You can use leverage with stocks, but it’s a far riskier proposition so it’s not nearly as common.

Some of the downsides to real estate investing that stock investors don’t have to deal with; the ongoing expense of maintaining the property, dealing with tenants, and a lack of liquidity when it’s time to sell.

The bottom line on real estate vs. stocks is that it’s a personal decision. One isn’t necessarily always better than the other, and there are several factors to consider. Remember, you can always invest in the stock market, and include REITs or REIT ETFs in your portfolio, to gain exposure to the real estate asset class.

Final Thoughts on Real Estate Investing

No matter whether you prefer to invest in stocks or in real estate, every investor should strive to own a diversified portfolio. One of the best ways to accomplish diversification is by investing in multiple asset classes. In other words, I believe that all stock market investors should hold real estate in some form, and all real estate investors should own some stocks, or ETFs.

How you invest in real estate is up to you. Do you want to own a physical investment property and earn rental income? Or do you want to stick to your principal residence as the extent of your real estate investment exposure. And don’t forget about REITs.

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