4 Ways to Invest in the Real Estate Market

Jeremy BiberdorfBy: Jeremy Biberdorf

August 17, 2019August 17, 2019

4 Ways to Invest in the Real Estate Market

By: Penelope Graham, Zoocasa

For most Canadians, purchasing a home for use as a principal residence is the largest investment they’ll ever make. It’s also one that has paid off handsomely for those who’ve been in the market long term.

According to the Canadian Real Estate Association’s MLS Home Price Index, which measures the overall value of homes sold, appreciation in the Canadian housing market increased nearly 76% between June 2009 – 2019. The nation’s major urban centers experienced an even greater uptick over that time frame, with home values soaring 122% in the Greater Toronto market, and by 92% in Greater Vancouver.

There are some clear benefits to investing in real estate as an end user – one is the ability to use leverage to get into the market with relatively very little down (in Canada, a principal residence priced below $1 million can be purchased with a down payment between 5 – 7.5%), and equity grown over time is also a form of forced savings, with a positive impact on the borrower’s credit score.

The downside, however, is that home ownership is a generally illiquid investment. One must sell their home and absorb considerable transaction costs to access their equity: land transfer tax, real estate commissions, and the costs of moving can all chip away at your returns. And, should the market have taken a downward turn since the home was purchased, it can be an especially painful crystallized loss, as home ownership is as much an emotional investment as it is a financial one.

Beyond residing in your investment, however, there are a number of ways investors can get their feet wet in the market, with varying degrees of involvement. Here are a few common ways for Canadians to invest in real estate.

Becoming a Landlord

The most traditional way of expanding one’s investment in the real estate market is to purchase rental property. On paper, the benefits seem straightforward – investors can still use mortgaged leverage to buy the property, and directly offset their mortgage payments and maintenance costs through the rent they charge.

Depending on the size of the rental, between 50 – 100% of its projected profit can be considered by your lender when qualifying you for financing. Once the mortgage is paid off, rent turns to profit – and all the while, the property itself is appreciating in value in an upward market.

However, wading into rental takes considerable upfront capital, not to mention personal time and effort. Investors can expect to put more down on a rental purchase – if it is a secondary property where the landlord does not dwell in one of the units, the mortgage cannot be insured and requires a minimum down payment of 20%.

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If the landlord resides in one of the units as their principal residence, the down payment may be between 5 – 10% for homes with up to four units, depending on the purchase price. Buying a larger commercial rental property, however, may require as much as 50% down.

Landlords must also be prepared for initial spend to repair and renovate the units before putting them on the rental market. As well, they are directly financially exposed should their units remain untenanted, the tenant withholds rent, or damages the unit. Again, when it comes time to sell the property, the investor must pay transaction and mortgage closing costs.

Joining a Real Estate Investment Group

For those who wish to own rental units but don’t want the direct exposure and responsibilities of a landlord, a real estate investment group offers a much more hands-off approach. These investments work via a private company, which purchases rental properties and then sells units to investors.

It is considered a “mutual fund” approach to owning rental – the investor simply collects proceeds from their rental while paying fees to the investment group, which handles the tenanting, management, and maintenance of the property.

This type of investment can be purchased with leverage, but will require the investor qualify for financing, and an up-front down payment. However, as the group has more purchasing power than an individual, it allows investors to participate in parts of the market they normally wouldn’t have access to, such as higher-priced commercial properties.

That said, some services such as RealtyMogul allow you to invest in commercial real estate REITs.

As well, because participants pool part of the fund to offset the costs of untenanted units, they have less exposure to these losses than a traditional landlord.

Investing in Real Estate Investment Trust (REIT)

REITs are the easiest, and most liquid, way to invest in real estate; essentially, they are trusts or corporations that use investor funds to purchase and operate rental properties, and pay out 90% of their taxable profits to investors as dividends. Investors can buy and sell REITs as stocks on an exchange, taking a completely hands-off approach to the management aspects of the rental.

With a REIT, there’s no need to qualify for a mortgage to participate, and no associated transaction costs other than trading fees. However, this lack of leverage requires upfront capital to get into the game.

Real Estate ETFs

Exchange-traded funds, which bundle a number of themed investments into a single fund, have been rapidly growing in popularity as they offer a well-diversified approach to investing in a sector, and generally come with fewer fees than mutual funds.

Real estate-themed ETFs generally combine stocks issued by several REITs, allowing investors exposure to a wide variety of property types which can include residential homes, commercial rentals, and even hotels. Again, using leverage isn’t an option to buy into ETFs, meaning investors will need sufficient up front capital.

Who Should Invest in Real Estate?

As real estate can be both cyclical and sensitive to economic shifts and government policy, it can be a more volatile asset, especially for those looking to invest in the short term.

As with any investment, it’s vital participants understand their risk exposure, and select an instrument that suits their exposure to the housing market, investment horizon, and need for liquidity; a trusted advisor with knowledge of the market can be a great ally when selecting the right type of real estate investment for you.

Penelope Graham is the Managing Editor at Zoocasa.com, a real estate company that combines online search tools and a full-service brokerage to empower Canadians to buy or sell their homes faster, easier and more successfully. Home buyers can browse houses for sale and MLS listings on the website or the free iOS app.

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Jeremy Biberdorf
Jeremy Biberdorf

About the Author:

Jeremy Biberdorf is the founder of Modest Money. He's a father of 2 beautiful girls, a dog owner, a long-time online entrepreneur and an investing enthusiast.

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