Why invest in real estate?
Are you still hesitating to invest in real estate? We explain why and how you can invest to make your projects a success.
Real estate investment is becoming increasingly popular. There are many ways to invest, whether you’re a seasoned investor or simply looking to make your first investment.
How to invest in real estate? 4 ways to invest in real estate
1. Buying your own property
Investing in real estate doesn’t always mean making money. For some, it’s simply a matter of finding a place to live. It’s one of the best ways to invest in real estate.
The benefits
First, by buying your home, you build equity with your monthly payments rather than paying rent that increases every year. What’s more, banks tend to be more favorable to homeowners, offering lower mortgage rates and requiring lower down payments. Finally, current mortgage rates are at record lows, making housing more affordable.
Disadvantages
If you haven’t done your calculations properly and you have a mortgage, you can sometimes find yourself in a precarious financial situation. Failure to make your payments can result in the mortgage lender seizing and selling your property, and you losing the money you’ve invested. It will also have a very negative impact on your credit rating. What’s more, if your lifestyle requires you to move regularly, buying your own property may not be for you. Indeed, it’s not as easy for a landlord to move as he likes as it is for a tenant.
2. Buying an income property
If you’re ready to take the next step, you can buy an income property, such as a duplex. It’s a good way to diversify your investments, as the residential real estate market is easier to analyze than if you were to go straight into commercial investment.
The benefits
One of the main advantages of investing in an income property is that the basic investment is lower than for a commercial investment. What’s more, you can also get a great deal on a bank-owned property.
Last but not least, if you have solid tenants, you’ll receive their rent on a monthly basis, giving you a fixed income.
Disadvantages
Buying an income property requires a substantial down payment, which can be as much as 30% of the sale price. If you’re just starting out in real estate investment and don’t yet have too much capital, this can sometimes be restrictive. One way around this is to buy a property and become an owner-occupier.
The main disadvantage is surely when owning an income property, you have to manage the property and make decisions on what needs to be improved. You also have to manage the tenants in your home. If one of them doesn’t pay the rent, you have to make the payment to avoid falling behind on your loan.
3. Doing flips
Buying a property to restore and then resell is an increasingly popular activity for those wishing to invest in real estate. It requires a good eye for assessing the value of a property and, of course, a more operational knowledge of things.
The benefits
Flipping a property is a great way to make a quick profit. If you have the capabilities, this is an option to consider very seriously.
Disadvantages
Flipping a property requires a very good knowledge of the real estate market. Indeed, you need to be able to find a property to restore for a reasonable price and estimate as accurately as possible the price at which you can then resell it. The slightest mistake can cost a lot and reduce profits. It is therefore necessary to have in-depth knowledge of real estate.
4. Buying shares in a real estate investment trust (REIT)
Unlike previous options, buying into a REIT is a passive way of investing in real estate. It’s a great solution for those who want a return of liquidity and the simplicity of owning a share.
The benefits
It doesn’t require much up-front investment: $20-$30 initial investment, depending on the stock. Plus, you don’t have the inconvenience of having to manage a property. Shares can be sold immediately at any time without transaction costs. It’s also a good way to get a very good return on investment over the long term. This allows you to diversify your investments in different real estate sectors. Finally, you’ll make a regular quarterly dividend.
Disadvantages
As with any share, prices can fluctuate according to market trends.
How do you know if you’re ready to invest in real estate?
Before you start investing in real estate, it’s important to ask yourself what kind of investor you want to be. Each of the above ways of investing can earn you a lot of money. The real question is more about your financial position and how personally invested you want to be.
These are the three main points you need to clarify before taking the plunge.
- Financial resources: Do I have enough resources to invest? Do I have enough resources to pay if one of my tenants doesn’t pay the rent?
- Will: Do I really want to act as a landlord in front of tenants? Wouldn’t I rather analyze offers and investments like REITs? Am I ready to handle everything that goes with a flip?
- Knowledge and skills: Do I have any particular skills that make one type of investment more suitable for me than another? Can I do repairs myself? Do I know how to analyze stock fluctuations and build an interesting portfolio?
How can investing help you reduce your taxes?
Using the Home Buyers’ Plan (HBP)
The HBP allows you to withdraw $25,000 from your RRSP to buy your first home without penalty. You can plan to put part of your downpayment into your RRSP, wait 90 days and “grate” that amount. This will entitle you to a tax credit.
Apply for tax credits
If you haven’t owned a property in the four years preceding your purchase, you are eligible for a tax credit. If you’re buying a new property, claim the GST and QST credit.
Buy an income property
If you buy an income property, you will be taxed on the income from that property. However, if you occupy the building, the portion in which you live will not be taxed on its capital gain and resale.
Real estate investors
You can deduct many operating expenses such as taxes, electricity, insurance, travel expenses, professional fees…