There’s no denying that homeownership may feel out of reach for some Canadians. The average house price in Canada was $531,000 in 2020. And if you live in the greater. Vancouver or Toronto areas, the price could easily be double. But that doesn’t mean you can’t diversify your portfolio and get in on the game. Whether you have $1 or $1,000,000, here are five ways you can invest in real estate:
1. Own your own home
The traditional way to own real estate is to purchase your own home. Most people won’t have the funds to pay cash, so you’ll need a mortgage. In many cases, all you’ll need is 5% down with insurance offered by the Canada Mortgage and Housing Corporation (CMHC). But there are some rules in place.
For example, the 5% down only applies to the first $500,000 you’re borrowing. If you need more than that, a 10% down payment is required for the remaining portion. CMHC basically backs your mortgage by providing you with insurance. There is a cost for this insurance, but it’s rolled into your mortgage.
“In an ideal world, you should save a 20% down payment to avoid CMHC insurance,” says Robb Engen, a fee-only planner at Boomer & Echo. “However, for many people, rising prices exceed their savings rate, so using CMHC can be a good tool to help them buy a home now.”
As long as you keep paying taxes and insurance on your home—and your mortgage, of course—you don’t have to worry about losing it. Market ups and downs don’t have much of an impact, which makes this choice lower risk (and a plus). And, buying your own home not only boosts your net worth by owning a valuable asset but also gives you some financial peace of mind.
2. Be open to real estate investment trusts (REITs)
Even if you don’t have a 5% down payment handy, you can still own a home (and many other properties) by investing in real estate investment trusts (REITs). These trusts own multiple assets, which can range from apartment buildings to shopping malls. Canadians can buy into these trusts by purchasing trust units. The process itself is very similar to buying stocks. The money that’s invested into REITs by consumers is used to buy and manage more properties.
What makes REITs appealing is that the trust manages everything on your behalf. They’re the ones who handle renovations, collecting rent, etc. The income earned from rent and capital gains is distributed to the various owners in the form of dividends.
“The benefit of a REIT over an individual investment is that you can choose an area to invest in rather than be confined to one or two properties,” says Colleen Ciccozzi, Senior Manager at Coast Capital.
How it works is that you can buy and sell shares of REITs stocks on the market through a brokerage account, similar to other public companies—which makes REITs probably the most liquid real estate investment out there. You can also buy shares of exchange-traded funds (ETFs), which own shares of many REITs trusts.
3. Go the rental route—if you’re ready
The idea of having rental properties is appealing to many people, but it often requires you to have some capital before you begin building your investments. Some people will take equity out of their primary residence, so they have a down payment for a rental property. But it’s not always that simple.
“In major cities, the rent you collect may not cover all your expenses, which would make your cash flow negative,” says Engen. “While it’s nice to have someone pay part of your mortgage, you’d still be relying on capital gains to turn a profit, and that’s not always a guarantee.”
In addition, owning a rental property means you’re a landlord. You’d be responsible for maintenance, insurance, and finding a good tenant. Sure, you could hire a property management company, but that’s another expense that will cut into your income. That’s not to say that having rental properties is a bad financial decision. This option could add thousands of dollars to your yearly income. And, if you decide to sell, you could turn a very nice profit. You just need to run the numbers to ensure they make sense in your situation.
4. Investigate online real estate platforms
In recent years, online platforms have allowed people to buy into a property at a low cost. Think of it as crowdfunding for real estate, but you get an ownership stake based on how much you put in. The online company finds the properties and manages everything, but then all the co-owners get a cut of the profits. Fundrise and Addy are two examples of online real estate platforms.
Generally speaking, these companies will find a property and then divide it into smaller sums that people can purchase. You could get in for as low as $1, or you could invest thousands. The choice is yours, but you can only buy what’s currently available.
While buying in with just a few dollars is appealing, online real estate platforms are still relatively new. The estimated return on investment is not a guarantee. If you’re going to go this route, you’ll want to read the fine print to know when and how you can pull your money out.
5. Flip that house
No doubt, TV shows on house flipping have glamourized the process. If you have the know-how, are totally hands-on, and are fully devoted, this option could very well come through for you. Just keep in mind that the key is to buy low. The updates and renovations you plan rarely come out on budget. Also, be sure to talk to a real estate professional about the local markets you’re interested in. The upside is you could make a good profit in a matter of months versus the much longer time frame with other real estate investments. So the effort might be worth it—and perhaps even fun.
Make the best decision for your future
Investing in real estate is a financial commitment. If you decide you do want to purchase rentals or flip houses, be aware of any risks you could be taking on and make sure you have determined a plan of how you will earn your investment back.
Other important tips: No more than 20% of your net worth should be dedicated to real estate, Ciccozzi recommends. “More important, if you want to invest in real estate, it is important to diversify across locations and types of real estate, not just personal rental units,” she adds.
Investing in real estate has become easier over the years, but it’s still a personal decision. If you’re going to invest, you need to have a strategy that works for you.
If you’re ready to start down the real estate investing path, talk to a Coast Capital financial advisor about ideas and options.