Many Canadians no longer consider real estate as only something they can live in. For the past several years, Canada’s real estate market has become a booming industry exhibiting immense returns.
Real estate investment is an ideal way to park your capital to watch your investment grow. It’s also a fantastic way to create an income-generating source. To give you a perspective of how popular investing in real estate has become, here is an interesting statistic:
Canadian investors and foreign buyers spent $34 billion on buying land and entry-level acquisitions in 2018.
Many Canadians looking for ways to invest in real estate are hesitant. A reason for that could be the fact that there is little information out there that offers real value.
I will focus on preparing you for your endeavor in real estate investment in Canada. This article will be a guide that helps you understand ideal real estate investing options in Canada that you can leverage.
Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOCs) raised $6.5 billion in 2018.
Table of Contents
1.Principal Residence Property Investment
The first, and arguably, the most important method for real estate investing in Canada is principal residence property investment. Purchasing a principal residence (primary residence) is a long-standing approach to investing in real estate.
When you buy a primary residence, you don’t just buy a place to live in – you are making a long-term investment.
When you own a principal residence, you’re not helping your landlord pay their mortgage. You are paying off your own mortgage and growing your wealth. To purchase your own residence, you need to save up capital for a down payment.
Remember that when you purchase a residential property, its status as a principal residence is a crucial tool for you in terms of financial planning.
The Canada Revenue Agency (CRA) allows you tax exemption from any profits you earn by selling a principal residence.
This exemption is crucial when it comes to real estate investing in Canada. All properties that you own are subject to tax when they increase in value. This value appreciation is called a capital gain, and any asset that grows in value is subject to capital gain tax.
When you sell a property, you are liable to pay capital gains tax on half the profit you earn from selling it. If you are selling a principal property, however, the CRA provides you with a complete exemption on all capital gains tax you would otherwise owe on the transaction.
Related Reading: How to Save On Taxes in Canada
Besides the principal residence status, there are several things you need to consider when you are investing in real estate.
Things to consider when buying your principal residence
The cost of the property is a primary factor you should consider. However, there are a few more things you should keep in mind when you are buying your principal residence:
Your debt-to-income ratio
If you have the money to buy the property, you should purchase the house for cash. You can also afford to buy a house if you have enough for a down payment, and you qualify for a mortgage on a new home.
Real estate investors with a bad debt-to-income (DTI) ratio might not qualify for a mortgage on a new house. Make sure you have a decent DTI ratio before you buy a property.
The housing market situation
A sound personal financial situation is not the only factor to consider. Purchasing a house is a considerable investment, and the housing market is different now compared to what it used to be.
Previous generations enjoyed massive profits through the property they owned by selling it several years later. Many homeowners lost significant money when the housing market crashed a decade ago.
I think the housing market situation in 2020 could warrant purchasing real estate at a bargain if you time it right.
The economic environment
Similar to the housing market situation, the economy is a significant factor to consider. There are times when the housing market is down and years when it is exorbitantly priced.
In an economic environment where the housing market prices are incredibly low, you can enjoy terrific long-term gains if you buy property on a bargain.
Consider your lifestyle
When you’re purchasing a principal residence, it is going to be a place you will call home for a while. Consider your lifestyle and the suitability of the residential property based on your needs.
You need to buy a house that you can afford the mortgage for and meet your needs from a residence. You are investing in a home when you purchase a primary residence – not simply buying a house.
Should You Rent or Buy?
Here’s an excellent video that can help you decide whether or not to buy or rent your home.
2.Buy and Hold
Another traditional method of real estate investing in Canada is to create a buy and hold strategy. There are several ways you can accomplish a successful way to generate income from your real estate by buying and holding on to your property.
- You can purchase a single-family home and rent it out to a family.
- You can purchase a multi-family home, live in one of the units, and rent out the rest.
- Purchase a multi-family home and rent out all of the units.
A successful buy and hold strategy can help you generate significant income from your property through the rent.
It can help you eventually cover the mortgage costs and earn a profit. The longer you hold on to the property, the more potential appreciation you can enjoy on the property value.
3.Residential Rental Income
An excellent way to use real estate investing in Canada is to purchase a residential property and rent it out. Owning residential property opens up the opportunity for you to earn an income from your investment through monthly payments from your tenants.
The income you earn can go towards paying off the mortgage on the property and adding more cash flow for you to use.
Remember that owning residential real estate can be hard work. It is an active investment, and you will need to be involved in the affairs of your property with a more hands-on approach. Most people tend to manage residential rental properties themselves.
If you do not want to play the role of an active landlord, you can hire a property manager to deal with the tenants, look after the property for you, and ensure you get the rent on time.
Make sure your residential rental property is producing enough cash flow that you have enough left over after paying the expense of hiring a property manager.
Residential rental income can be a source of substantial income for real estate investors. According to Global Property Guide, you can earn a gross rental return of over 4.5% for apartments in Montreal, and it can go as high as 6% for apartments as small as 645 square feet.
Related Reading: How To Make Passive Income in Canada
4.Commercial Rental Income
Commercial rental income is an uncommon method for individual investors to generate income through real estate investing in Canada. Commercial properties can include anything from office buildings to shopping malls and everything in between.
Commercial real estate properties allow businesses to operate on the property to generate income. Owners of the property can earn significant income through the rent from their tenants.
The earning potential for commercial property is immense. According to Statista, the average asking rent for office space in Downtown Toronto amounted to $37.05 per square foot. It is among the most expensive markets in the city. A 2,200 square foot office space can have a quoted rent of $81,510. That is almost $6,800 per month in rental income.
Of course, you need to consider that commercial real estate is also an active investment. You need to be hands-on with managing the property and dealing with tenants. Depending on the type of commercial property you own, the intricacies of handling the management of the property can also drastically differ.
Between the exorbitant upfront capital needed to purchase commercial rental property and the complexities of managing it, many people might not prefer directly purchasing commercial property.
A more realistic way to capitalize on commercial real estate income is through REITs or REIT ETFs. I’ll discuss both later so you can get a better idea.
Flipping properties, if done right, can help you make substantial profits. It is a remarkable method of real estate investing in Canada.
The idea behind flipping properties is that you buy a property that needs to have some work done on it. The property needs to have significant potential to increase in value if you renovate it.
If you can find a residential property that needs fixing up and renovate it quickly, you can sell it for a handsome profit. While it may seem like a straightforward deal to buy houses, fix them up, and sell them for a profit, house flipping does not always pay off.
You can run into a wide range of issues. You must know what you are getting into before you decide to go with this strategy. Buying just any property because it needs fixing up does not work.
To increase your success in property flipping, you need to look for property that requires some cosmetic upgrades, but it does not have major faults like a leaky basement or structural defects.
Before you invest in any such property with the intent of flipping it, you should talk to a realtor and make sure you will be able to resell the property for the amount you are looking for.
If the house fits the bill, you need to calculate the cost of renovations and compare it to the final price once it is ready to sell. If it gives you the opportunity to turn a significant profit, it is worth the investment.
Related Reading: Best Investments in Canada
6.Airbnb Your Property
You do not necessarily need to take a traditional approach when it comes to renting out residential property. Long-term rental websites like Airbnb allow you to rent out a space to help you earn some extra cash.
You do not even need to rent out an entire home to earn some money off of the Airbnb platform. The short-term rental website allows you to rent out a spare bedroom in your residence to earn some extra cash.
You need to make sure that you consult any municipal bylaws and condo board rules, wherever applicable before you rent out your place on a short-term rental through Airbnb. There are increasing restrictions in Airbnb regulations due to a slew of reasons.
According to the Globe and Mail, Airbnb recently applied a limit to book Airbnbs to young Canadians after an unfortunate incident in Toronto.
It is best to be entirely aware of any regulations to make sure you are complying with all the laws. You will also want to keep a close eye on your property since short-term tenants do not typically take good care of the property as much as long-term tenants usually do.
7.Land Rental Income
You can even use vacant land to earn a rental income. If you own vacant land, you can rent it out to any interested parties who may want to use the land for a variety of reasons. The most common source of land rental income is through renting it out to farmers.
As the farmland tenants, they will pay you the rent on a monthly or annual basis so they can generate revenue. You should know that if you earn rental income from vacant land, you may be liable to pay taxes on the revenue.
Owning vacant land and using it for rental purposes can be beneficial for you even when you have no active tenants.
If you are not earning rental income from the vacant land, the CRA will consider your costs for maintaining the property as capital expenditures. It means that your expenses for maintaining the land, if any, can be added to the original cost of the property on sale.
The cost of the property is higher due to that amount if you are selling the vacant land. For more detailed information on taxes for a vacant land, you can read the information on CRA’s website here.
Real Estate Investment Trust stocks are a fantastic method for you to capitalize on real estate investing in Canada. REITs are companies that own and operate income-generating properties.
A REIT can own a large portfolio of properties that can include commercial properties, including offices, apartments, hospitals, shopping centers, and even residential properties. You can buy and sell shares of publicly-traded REITs listed on the stock exchange through a broker.
Buying shares of a REIT offers you exposure to the real estate market without the hassle of a hands-on approach, it makes the real estate more accessible, and it provides you a significant payout through dividends.
It is ideal to invest in a REIT that has a track record for stable prices and a history of reliably disbursing payouts to its shareholders.
The REIT industry has been around for more than 25 years. From five REITs in Canada in 1996, there are almost 40 REITs trading on the Toronto Stock Exchange. The industry is increasing in popularity due to the ease REITs provide Canadian investors interested in the real estate sector.
You can buy Canadian REITs for free with Wealthsimple Trade, which doesn’t charge any trading fees. Get a $10 signup bonus here.
Related Reading: Best REIT stocks in Canada
9. REIT ETFs
Another terrific method to capitalize on real estate investing in Canada is through REIT Exchange-Traded Funds (ETFs). When you invest in specific REITs, you are relying on the performance of a single company to grow your capital. It can leave your investment at risk of losses if the REIT suffers or declines on the stock market.
REIT ETFs provide you the option of investing in a diversified portfolio of REITs. It is a passive investment that consists of shares of the top Canadian REITs. You do not need to go through the hassle of choosing a specific REIT.
Owning an ETF automatically gives you diversification over several types of real estate properties like residential properties, retail, office, apartments, industrials, and much more.
Diversification in your investment portfolio can result in lower risk to your capital. It is an option that more conservative investors can consider.
REIT ETFs do not necessarily provide the same returns as individual REITs can. They are also prone to be less volatile in times when the stock market is experiencing a rough patch. You can buy REIT ETFs for free and receive $50 in free stock trades with Questrade here.
Related Reading: Best REIT ETFs in Canada
Real Estate Investing vs. Stocks
A common thing that people ask is whether they should consider investing in the stock market or the real estate market to gain more substantial returns.
The Canadian real estate market is a booming industry. However, the Toronto Stock Exchange is another phenomenal place to park your capital for terrific returns.
According to this real estate agent, even he admits that Canadian stocks have averaged an increase of 6.0% per year compared to a 4% increase per year in Canadian real estate values in the past 25 years. It may seem like stocks are a better investment than real estate.
But his argument is that you can use leverage for outsized gains. If you invest $100,000 in stocks, you get exactly $100,000 worth of stocks. If you invest the same $100,000 in real estate with 75% financing, you can buy $400,000 worth of real estate properties.
According to the 6% per year average for stocks, $100,000 in the stock market can grow to around $405,000 after 25 years. The same $100,000 down payment invested in $400,000 real estate can grow in value to over $1,000,000 after 25 years assuming a return of 4%. This is more than double the returns if you invest in real estate.
But be aware, this is a double-edged sword. You are buying something on leverage, so if you lose money on your property value, your losses will hurt that much more. Albertans have been experiencing this problem in recent years.
Real estate could offer you more significant long-term stability and returns compared to the stock market if you are able to borrow at a low-interest rate. It is a tangible asset that will likely never go to zero. There will always be a use for real estate, and the only way you can lose money on your investment in the sector is by selling in a down market.
There’s room for both real estate and stocks in your portfolio. I own property and stocks and ETFs as part of my diversification strategy. The downsides of real estate are it is time-intensive and can have lots of research and planning involved. But the rewards can be well worth it.
When it comes to investing, I think it should never be an “either/or” approach. Diversity always works better in terms of getting you decent returns and protecting your capital.
Investing money in the stock market can be fantastic, but you should also consider investing in the real estate market.
There is a reason why it is one of the most popular asset class for Canadians to invest in: people like to invest in things they can touch and see.
Stocks can be a bit of an abstract concept for many people. There is an emotional connection to real estate that can develop that you just don’t get from buying stocks in a company!
I hope this article helped you understand the different methods of investing in the real estate market in Canada. If you want other options for investing, read my Wealth Awesome guide to investing in Canada here.