Investing in Real Estate in Ontario? Read This First!
If you’re interested in real estate investing, we’ve got a guide to help get you started.
By Emily Southey | 17 minute read
Real estate represents one of the most lucrative opportunities for investors, not to mention a chance to diversify your portfolio. But what is real estate investing and how can you become a real estate investor? These are the questions we answer today.
How to Start Investing in Real Estate
The first step to investing in real estate is deciding that you want to become a real estate investor. Luckily, doing so is relatively simple. There are no licences or certifications required. All you have to do is purchase an investment property, and voila — you are a real estate investor. That said, purchasing an investment property — and choosing the right type of real estate investment — is easier said than done. Below, we break down the different types of real estate investments available to investors.
Real estate investment trusts (REITs)
The easiest way to invest in real estate is to purchase a real estate investment trust or REIT. Why invest in a REIT? Mainly because it allows you to invest in real estate without the hassle of managing or maintaining a physical property. REITs are companies that own real estate. This real estate can be anything from condo buildings and residential homes to office buildings, warehouses, or even hotels. When you purchase a REIT, you are essentially purchasing a share of these properties. REITs function similarly to mutual funds or exchange-traded funds, except instead of stocks you are investing in real estate. Investors earn money from REITs in two main ways: through dividend payments and by selling an investment that has increased in value. Investing in a REIT is as easy as investing in a stock or mutual fund and can usually be done through your local banking institution. The height of convenience, REITs can be a great real estate investing option for beginners.
Another type of real estate investment is residential property. This is probably what you think of when you consider real estate investing. Purchasing a residential property for rental income can be extremely lucrative. However, it requires hard work and patience. First, you will have to decide what type of residential property to purchase. Some popular options include single- or multi-family dwellings and condominium units. From there, you will need to decide if you want to live in the property or rent it out as it appreciates in value. Renting out the property can give you some extra income, which may even be enough to cover your monthly mortgage payment. However, this usually requires more work, which you may not have time for. If managing a property isn’t feasible but you still want to rent it out, you will have to hire a property management company and budget for it. Once the property has appreciated in value, you can choose to sell it if doing so aligns with your investing goals. Of course, the risk of purchasing a residential investment property is that there is no guarantee it will increase in value. If the market takes a turn, there is a chance that you will be forced to sell your property at a loss. Therefore, before purchasing a residential investment property, be sure to work closely with an experienced realtor who can help you understand the market conditions. They can notify you of market trends and provide an informed prediction as to the future value of a potential property.
A third option if you want to invest in real estate is to purchase a commercial property. The opposite of a residential property, commercial properties are used for business purposes. The process of buying a commercial property is similar to that of a residential property, except you won’t have the option of living there yourself, which means you will have to rent it. Therefore, you would purchase the commercial property and then charge monthly rent to tenants. When it comes to commercial investment properties, you have several options. For example, you could rent an office building and charge businesses to rent space in the building. You could also purchase a warehouse and collect rent from companies that want to store products in your space. If the value of the commercial property rises, you can eventually sell it for a profit. Though if it decreases in value, you could end up selling it for less than the purchase price. In addition, another risk that comes with investing in commercial properties is that, depending on the size of the property purchased, it could be hard to find enough tenants to fill it.
One final type of real estate investing is house flipping. House flipping is when you purchase a property at a lower price, such as a fixer-upper home, renovate it, and sell it for a higher price to turn a profit. This can be a great option for real estate investors who want to make quick cash. However, it can be risky and is often more hands-on than other forms of real estate investing. For this reason, research is even more important when it comes to house flipping. You should make sure to choose an in-demand neighbourhood with no shortage of prospective buyers. It is also recommended to choose a home that does not need major repairs. A certain amount of improvements are guaranteed with house flipping but some upgrades are considerably more expensive than others. If you want to go this route without overspending on improvements, avoid properties that require major structural updates, such as roof replacements. The main risk of house flipping is purchasing a property that requires so many improvements, you end up spending more money on upgrades than you make when you sell.
Is Real Estate a Good Investment?
Though investing in real estate certainly has pros and cons, it is generally considered a worthwhile investment. Some of the main benefits that come with investing in real estate are as follows:
Steady flow of cash
One of the main benefits of investing in real estate is the steady flow of cash that may come with it. If you’re looking to increase your monthly income, investing in real estate could be a fantastic option. Whether you purchase a residential or commercial property, if you rent it out to tenants you can charge them rent that may cover the cost of your mortgage payments and then some.
Returns on your investment
Real estate is known for offering a great return on investment (ROI). If you buy a rental property in a premium location or you flip a house, you are likely to see it appreciate in value. Eventually, you can sell it for a considerable profit. But to get big returns, you will need to invest in the right kind of property (consulting with a realtor can help with this).
“Real estate investments tend to be longer term as the only way to gain access to your money after investing in real estate is by selling the property.”
Investing in real estate offers unique tax advantages that you may not otherwise be eligible for. For example, if you own an investment property, you may be able to deduct certain expenses, such as property taxes, legal fees, property management fees, property insurance, maintenance costs, mortgage interest, and more. When you eventually sell your property, if you sell it at a higher price than you purchased it for, the profit won’t be taxed as income. Instead, it will be taxed as a capital gain, which often translates to lower tax rates.
The key to a healthy investment portfolio is diversification, and investing in real estate allows you to do just that. Most investors start with stocks, bonds, or mutual funds, all of which can be worthwhile. But like stocks, investing in real estate is also lucrative. Plus, it will allow you to diversify your portfolio, which can protect you in the event of an economic downturn. Therefore, even if your other investments have decreased in value due to a recession, your investment properties may continue to increase in value, offsetting your other losses.
Opportunity for passive income
If you want to invest your money with minimal time and effort, real estate investing might be for you. The potential to earn passive income is huge in real estate. For example, you can invest in a REIT and avoid the hassle of property management, or you can purchase a residential or commercial property but hire a property management company to run things for you. No matter which option you choose, real estate investing provides an unparalleled opportunity to earn regular paycheques with minimal work.
Protection against inflation
Another benefit of real estate investing is that it might offer protection against inflation. When the price of goods and services rises, property values typically rise with them. Therefore, since your investment properties are likely to appreciate in value at the same rate as goods and services, it can protect you financially in the long term.
Chance to increase capital
Looking to increase your net worth? Real estate investing is a great option. When you sell an investment property, you will instantly boost your capital. This influx of cash is a major benefit for real estate investors.
Freedom and control
The last benefit of real estate investing is the control it offers. This benefit is non-financial but nonetheless important. When you invest in real estate, you have total control. You are your own boss, getting to decide how much money to invest, which property to invest in, and when to buy and sell. This level of freedom and control is unprecedented for some people and can make real estate investing that much more attractive.
How Real Estate Investments Compare to Other Investments
To determine whether real estate investment is right for you, let’s dive into how it stacks up against other popular types of investments.
Real estate versus stocks
Real estate is typically less volatile than stocks, but on the flip side, stocks are more liquid than real estate. Therefore, it is easier to sell your stocks and access the money earned than it is to sell a real estate investment. That said, due to the volatility of stocks, real estate investing is generally considered to be less risky.
Real estate versus bonds
In contrast to stocks, bonds are safer, low-risk investments. However, the rate of return is also lower. Therefore, investing in real estate typically offers higher returns than investing in bonds, which can be enticing for investors. That said, keep in mind that better returns often come with more risk, making real estate riskier than bonds.
Real estate versus mutual funds
Similar to stocks, investing in mutual funds requires less time and effort than investing in real estate. They are also more liquid than real estate. However, mutual funds may be more affected by economic downturns than real estate.
Real estate versus guaranteed investment certificates (GICs)
GICs are perhaps the safest type of investment, which makes them less risky than real estate. However, like bonds, the gains are small. If you want to turn a significant profit, real estate is a better bet than GICs.
Key Considerations Before Buying a Real Estate Investment
Before investing in real estate, you will need to carefully consider the pros and cons of doing so. Specifically, we recommend thinking long and hard about the following factors impacting real estate investments.
- Liquidity: Let’s face it, real estate is not a liquid investment. When you purchase real estate, your money will be tied up for a while, unlike when you purchase a stock or bond that can be sold in a matter of minutes. With real estate, the only way to gain access to your money again is by selling the property. Therefore, before purchasing an investment property, you must be prepared to part with a major chunk of money for a set period of time.
- Capital: The capital needed to invest in real estate in the first place is another factor to consider. As you likely know, buying a property doesn’t come cheap. In fact, property is likely the most expensive purchase you will make in your life. If you don’t already have the necessary capital to invest in real estate, you will need to apply for a mortgage loan before making an offer.
- Time: Related to liquidity, real estate investors must think about how much time they have to devote to their investment. Since profits aren’t realized quickly with real estate investments, you must create a detailed budget to ensure you won’t run out of money before you want to sell. Most investors should prepare to own their properties for at least a few years before cashing out if they want to turn a profit.
- Location: Location is another key consideration when thinking about investing in real estate. Location is everything when it comes to property value, which means you must choose wisely. Consult with a realtor to ensure you’re buying a home in an area where real estate prices are on the rise.
Tips on How to Be Successful in Real Estate Investing
Now that you know a little more about real estate investing, we’re going to let you in on some of our top tips for becoming a successful real estate investor. Check them out below!
1. Choose the right location
Location is everything when it comes to real estate. Therefore, above all else, choose a property with a great location. To determine if a location is good, see if it meets the following criteria:
- Low crime rate
- Great schools
- Parks and green space
- Access to medical care
- Access to public transportation
- Cultural amenities like shopping malls or restaurants
- High walkability rating
Ultimately, a neighbourhood that meets the criteria above is likely to be in demand when it comes to housing. Oppositely, if it meets little to none of the above criteria, it could be a sign that the housing market is stagnant or cooling.
2. Time your purchase wisely
Time your purchase wisely is another tip to being a successful real estate investor. To do this, you will need to research your local housing market or consult with a professional. A good rule of thumb is to avoid extremely hot markets. Instead, time your purchase when prices and capital investments are rising, construction is low, and affordability is good.
3. Calculate your upfront costs
Any time you invest in real estate, you must calculate your upfront costs. This is the only way to truly understand the cost of your investment. Your upfront costs are not just the purchase price or the realtor commissions. These costs also include the cost of repairs, updates, legal fees, property taxes, and more. If you intend on renting out the property, property management fees may be another expense to budget for. Ultimately, failing to budget for upfront costs can mean the difference between making money and losing money on a real estate investment.
4. Take advantage of the hidden market
You might think that the only way to buy an investment property is the traditional way (that is, searching for homes on real estate marketplaces and purchasing one with the help of a realtor). But there are other options. Known as the hidden market, some real estate investors choose to take advantage of homes being sold at auctions or those with distressed sellers who may not have even listed their homes yet. Tapping into this hidden market often translates to cheaper purchase prices, which can be extremely lucrative.
5. Be smart about upgrades
Whether you plan on house flipping or not, there are likely to be a few improvements involved. Being smart about these improvements is paramount. You want to choose repairs and improvements with big ROIs. This usually means choosing minor repairs over major ones. For example, painting a house can go a long way and will cost far less than replacing an HVAC unit. Further, when it comes to renovations, don’t opt for “the best of the best.” Fancy upgrades like granite countertops or high-end appliances usually don’t result in the payout you want. If you aren’t sure which repairs and upgrades are worthwhile, speak with a real estate professional or a professional stager. We also recommend shopping around and obtaining quotes from multiple contractors before hiring one to ensure you’re getting the best deal.
6. Maximize the value of your investment
One tip for successful real estate investing is to maximize the value of your investment in every possible way. This could mean a wide range of things. For example, it could be renting out a small corner of an office building to a bank to install an ATM or lobby space for a local coffee chain. Another option could be to offer services to residents of a condo or apartment complex, such as laundry, storage space, or trash pickup. Hiring a concierge or security guard adds a level of security that can increase the property value, allowing you to charge more money in rent. The sky’s the limit. Get creative and you’ll be surprised by how you can make even more money than you thought.
7. Understand the laws and regulations on real estate investing
Before investing in real estate or making changes to an existing property with the intention of renting it out, make sure you have a thorough understanding of the laws and regulations on real estate. You should take the time to research municipal, provincial, and federal regulations on the subject. Doing so can help you avoid trouble down the line. For example, you wouldn’t want to spend tens of thousands of dollars turning your basement into a rental unit only to discover this is prohibited in your town. Similarly, you wouldn’t want to convert the first floor of a commercial building into a residential space only to learn later that it goes against zoning laws.
8. Consider non-traditional types of real estate investments
Real estate investing is much more than condominiums or single-family homes. Though these can be worthwhile investments, so too can non-traditional types. For example, don’t rule out investing in office buildings, warehouses, storage units, or other industrial spaces. Depending on the market and location, non-traditional types of real estate investments might be just as lucrative if not more so than traditional property types.
Frequently Asked Questions
How can I become a real estate investor?
Becoming a real estate investor is relatively simple. No certifications or licences are required. Rather, you become an investor the moment you purchase a property for investment purposes. This property can be residential or commercial and it can be located anywhere in the world. To increase your chances of being a successful real estate investor, make sure to do your research, set clear goals, ask for help when needed, learn how to assess potential properties before purchasing, and consult with other real estate professionals.
Is investing in real estate truly profitable?
Yes, investing in real estate can be extremely profitable, so long as you are smart about it. Signs of successful real estate investors include developing a clear plan, setting achievable goals, educating themselves on local laws and real estate concepts, hiring an accountant and attorney, consulting with a realtor, and keeping up to date on economic and market trends.
How does real estate investing compare to stock investing?
Real estate is considered to be less risky than stocks, which tend to change in value quickly. However, real estate is also less liquid than stocks. When you invest in stocks, you can sell them in a matter of minutes and gain access to your money right away. In contrast, real estate investments tend to be longer term as the only way to gain access to your money after investing in real estate is by selling the property.
What kinds of properties should I invest in?
Real estate investors can invest in any type of property they want, from residential properties to commercial properties. Generally, investing in condominiums is recommended for beginners owing to the lower purchase price and minimal maintenance required.
What types of property a real estate investor should avoid?
There are no properties that a real estate investor should avoid. However, there are certain circumstances that are best avoided. The top mistake real estate investors make is overpaying for a property. Spending too much on an investment reduces the amount of profit you will earn when you eventually sell it, and in some cases, may prevent you from turning a profit altogether.
How can I start a real estate investing business?
There are no degrees or certifications required to start a real estate investing business. As with starting any business, do your research, network, develop a business plan, and start investing. Keep in mind that depending on the profit your business earns and its size, you will likely be required to register it with the federal government.
What is the best place to invest in real estate?
The best place to invest in real estate is anywhere with a rising housing market. Oftentimes, this translates to major urban areas or up-and-coming cities bordering urban areas. However, since market conditions are constantly changing, the only way to discover the best place to invest in real estate is by doing your research and/or consulting with a realtor.