Consider options, advantages, and disadvantages before investing in this alternative
Even during the pandemic, real estate investing has been one of the best alternative means of diversifying your portfolio and increasing your returns …. If you know what you’re doing.
What is real estate investing? Investing in real estate means buying, leasing, renting, or selling pieces property for profit. Real estate investors are typically more hands-on than stock investors, who don’t make decisions for the companies in which they invest. Real estate investors may actually be involved in house flipping or property management while gleaning the returns from it. They could also be taking a more passive approach and investing in real estate investment trusts (REITs).
How does investing in real estate work? When you invest in a property, the money that you are putting into it is called your investment or equity. That’s the difference between what you owe on a mortgage and a property’s value. It can increase with your monthly mortgage payments – or decreases if the value falls. If your major investment is your home, it’s considered your “principal residence”, which can help you get a capital gains tax exemption if you sell it.
How to invest in real estate: There are a wide number of options to fit your budget and schedule.
You could invest in your own home or buy a property that needs fixing to sell – or “flip”– for a higher price than you paid. That’s most profitable when you do all of the renovations yourself. The key is to understand what you’re buying, and whether there could be any hidden costs, such as structural damage, which could destroy your profit, and how much you can sell for in the area you’re interested in. It can be particularly profitable if you buy in an area that is gentrifying.
You could also buy a house, condo, duplex, or townhouse, vacation property (furnished house or apartment), or land to rent out. You can gain cash flow as well as long-term appreciation from your rental property, but you will also be responsible for maintenance and cleaning costs. Ensure that you invest in a desirable area, close to schools, jobs, and hospitals, or tourist destinations if it’s a vacation property, and be aware that mortgage costs can be higher for rentals than your home. Vacancy rates can impact your rentals and vacation properties can leave you vulnerable in a pandemic. With land, you could also sell it or build on it to increase its value.
Another option is buying a commercial property – though you really need to do your homework here as some classes are doing better than others right now. Commercial real estate includes malls, shopping centres, industrial complexes, grocery stories, and offices, and they usually rent out space for the long-term. These require a huge upfront investment, but can earn more if you choose right.
Finally, you could invest in a REIT, which is a real estate company that owns and manages several properties, so you aren’t just investing in one. As one of its investors, you pool your money with others so the company can buy, and manage, its real estate. You provide the money, but you share in the profits through dividends. So, you also want to check out the company, management, track record, and properties to ensure that it covers several regions to hedge against real estate losses in any given area and ensure that you profit while also diversifying your investment profile.
Check out the best REITs to invest in Canada for 2023 in this article.
What to consider in real estate investing: As with any investment, you need to know what you’re doing if you really want to profit from this alternative investment class. Gains, and losses, can be great, but so can management and maintenance costs, especially in storm-prone areas. So, you could start with doing your homework and investing in a REIT. Or you could learn the ins and outs of investing in rental, commercial, or residential properties to find out what’s most profitable where as there is still a lot of truth to the old real estate adage of “location, location, location”.
Advantages of real estate investing: It can be one of the most profitable investments and supplement your income, once you factor out the costs of owning and operating any property that you buy. If you’ve bought property, you can also increase your equity as you pay off the mortgage. Real estate can diversify your investment portfolio, especially since it’s not usually tied to the stock market movements. It can provide a hedge against inflation as home prices and rent increase with inflation. It can also be considered a business income and provide tax breaks if you write off property taxes, depreciation, mortgage interest, and even maintenance and repairs. You can also provide some good in your area by providing affordable housing or adding new business space.
Pitfalls of real estate investing: It can be very expensive to get into, particularly if you’re buying the property, and then have to fix it up. You can’t just sell a property as easily as a stock, either. You have to list and market it, then sell it, and wait for the mortgage process to finish to collect your money. Vacancy rates can impact your renting, too, and if your property is vacant for awhile, it can be expensive to sustain. Flipping houses or managing rental property is time-consuming, though you can hire a property manager to help you, but that adds another cost. Maintenance and repairs can also be expensive, and the real estate market can also be as unpredictable as the stock market. Generally, the real estate market rises, but that depends on supply, demand, and interest rates, which are steadily rising right now as the central banks fight inflation.
