While investing is often associated with stocks and bonds, the Canadian real estate market provides potential investors with plenty of lucrative opportunities. When mortgage rates are low and properties are available, savvy buyers can make a tidy profit in the housing market. However, before an individual decides to invest, they must understand the different ways to invest in real estate, as well as the advantages and disadvantages of each.
Buying, selling and renting
Buying real estate directly is the most common way to invest. Buyers typically purchase a residential property at a low price, renovate it or wait until the market improves, and sell the property at a profit. Buying homes also presents Canadians with the chance to become landlords. Purchasing a property and renting it out to tenants can be a great way to bring in extra income on a steady basis.
While buying and selling can offer investors a quick turnaround, and renting out homes can provide regular income, both options have their disadvantages. When it comes to buying and selling, investors run the risk of sinking too much money into a fixer-upper in an attempt to get a better sales price. As for renting out homes, becoming a landlord means taking on a number of responsibilities, something not every individual may have the time and energy for.
Of course, buying real estate isn't strictly related to residential homes. Commercial mortgages can provide investors with financing for a space they can rent out to businesses. Not only will this bring in steady income, but businesses tend to keep properties well-maintained in order to attract customers, thereby acting as guardians of a property and requiring less management from the owner. Of course, renting to a business still means that an individual is acting as landlord, putting them in charge of things like maintenance, repair and many other obligations.
Real estate investment trusts
Real estate investment trusts, or REITs, are stables of properties run by corporations, or trusts. REITs are bought and sold like stocks, with investors providing the capital to purchase and operate the properties, generating profits from whatever income the properties generate. While most corporations would have to pay income tax, REITs are exempt since 90 percent of their taxable profits are paid out in the form of dividends.
While REITs can pose the same risks as other stocks, they are generally reliable investments for individuals seeking steady income. Additionally, REITs can make it easier for investors to break into commercial real estate, as REITs often involve properties such as offices and retail spaces.
Investment groups provide opportunities for investors to reap profits from rental properties without acting as a landlord. Instead of purchasing a rental property directly, investors join a company that buys and operates the properties, whether they be rental homes, apartments or condominiums. While an investor technically owns the property they buy, they are not responsible for maintenance, finding tenants, advertising the space or any other obligations that usually come with ownership. The company itself will handle these responsibilities in return for a percentage of the profits.
While this can be a much easier way to bring in income from rental properties, it also means less money for investors. Not only does the company take a percentage of rent profits, but investors usually pool their money together to protect against things such as extended vacancies, further cutting down on profits. Investment groups pose less risk, but also offer less reward.