Financial Friday #157: How to Dip your Toes into Real Estate Investing

How to Dip your Toes into Real Estate Investing

Unless something drastic happens to the housing market or interest rates, the viability of purchasing an investment property is currently out of reach for many investors. Even if you have money and access to credit, it can be difficult to make a profit purchasing and renting out a home if you are just now getting into the game.

There is also no guarantee that house values will rise like they have in the past few years and even though rents are high, so are mortgage payments, municipal taxes, repairs & maintenance — and many other costs associated with owning an investment property. In addition, the cash outlay required is a lot more than many people have or want to invest, and being a landlord can be time consuming and stressful. Fortunately, if you would like to dabble in real estate without going “all-in” there are few options.

Real Estate Investment Trusts (REITS)
A REIT is a company that owns and/or manages a portfolio of properties that could include commercial buildings, apartments, shopping centers, residential homes, offices, and other types of real estate. The diversity and mix of properties vary from one REIT to the next and there are currently around 35 REITS trading on the TSX. A REIT can be held in your RRSP or TFSA.

REITS are unlike stocks in that investors are usually paid a monthly distribution (dividend) based on the performance of the properties. There is also the chance for gains through appreciation of the share price. REITs are a convenient option to add more diversity to your stock portfolio. Unlike owning a property, REITs are completely liquid and can be easily bought and sold — you could start investing with a few shares purchased through an online brokerage.

The disadvantages are that you may not be able to find a REIT with a mix of properties you like, and your investment is only going to be as good as the REIT management. There are also Exchange-Traded Funds (ETFs) that hold a pool of REITs to help diversify exposure and lower the risk compared to owning an individual REIT.

Fractional Property Ownership
Fractional property ownership or crowd-funded ownership is a relatively new concept where investors join together to collectively own a particular real estate asset — it could be an apartment building, commercial property, or even a residential home. It is different from a REIT in that you invest and own a share of a specific asset.

The property is sold in individual units and there are terms and conditions specific to each offer. Investors gain from sharing of rental revenues and the eventual sale of the property. Although you can get started for a very small investment, the maximum investment may also be capped, so you may have to find several opportunities.

The disadvantage of fractional ownership is that individual real estate assets can fluctuate greatly in value and you can only sell and cash out your shares after the date prescribed in the ownership offer – they are not liquid.

Private Lending
A third option which can offer very good returns is "playing the role of banker" and lending money to a private party, usually with your loan backed by the value of real estate. There are various reasons why some people have trouble getting a loan or mortgage from a bank — they may be self employed or newly employed for example. Others may need some kind of bridge financing to tide them over for a few months and the situation doesn’t fit the bank’s rigid requirements.

While due diligence is extremely important and you have to do your homework (and have expert advice), these types of opportunities do allow you to manage risk to a large degree and offer exceptional returns, especially as mortgage rates climb higher and banks get increasingly strict with their lending requirements. The other advantage is that you can select opportunities that match your investing amount and timeline. For example, you may be able to find a short-term deal for $20,000 if that matches your investment needs.

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