Real Estate Investment and Investing in Canada | Wealthsimple (2024)

Canadian real estate has become so much more than a place to live. The meteoric rise of real estate prices in recent years has turned properties into a way to both park money and make money.

Itcostjust an average of $351,575 to buy a home in the Greater Toronto Area in September of 2000, in today’s dollars. Nineteen yearslater, it costs $843,115. That’s an increase of almost 140% when factoring ininflation.

The price explosion becomes even more pronounced when you look at single-family homes in Toronto Central. In 2000, a detached house close to transit and jobs cost just $515,322 in today’s dollars. Now it costs a incredible $2,091,768. That’s an increase of 306% and an appreciation of 16% annually, a return that beats the stock market. In that same time period, the S&P/TSX Composite indexreturnedjust 4.52% a year, adjusted for dividends and splits.

In fact, almost every market in Canada, besides perhaps the Prairies, has enjoyed medium to long-term housing gains. Nationalhousing pricesrose by 109% from January 2005 to December 2016.

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The steep rise of real estate has buoyed the wealth of the nation, with principal residence and other real estate holdingsaccountingfor 51% of the real growth in family-owned assets.

It’s easy to see why, with these statistics, that investing in Canadian real estate has become so popular among foreign and domestic speculators, whospent$34 billion buying land and entry-level acquisitions in 2018, the second-highest year on record. Meanwhile, Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOCs) raised $6.5 billion. At the same time, small-time investors have been snapping up condo units, multi-family residences and single-family homes to rent out. With a national vacancyrateat just 2.4% it’s highly likely they will be cash flow positive

Unlike the often ephemeral stock market, property seems like a safe bet. If it doesn’t work out, at least you have something: a roof, the land, bricks. However, real estate investing is only as risky or safe as the particulars of your circ*mstance.

What is real estate investing

Real estate investing generally doesn’t mean buying a home to live in. While a home purchase may result in appreciation (although probably a lot less than you think once you factor in interest, repairs, utility bills, taxes, closing costs and inflation), you’re not getting the tax advantages associated with investing or a monthly cash flow. And since you’re not getting any rental income, you’re sinking your own money into expenses that do not contribute to its appreciation. Think mortgage interest, property tax, insurance, utilities, lawn maintenance etc., In an ideal investment situation you would never have to dig into your own pocket because the rental income would cover all those costs.

Plus, since you always need a place to live, it’s hard to buy and sell your home at the most adventageous market time, as you would with a true investment. Instead, you usually buy your home when you need the space and can afford it, and sell it when you don’t want to live there anymore — it’s rarely possible to time the buying and selling as to when it will make you the greatest return, because your main consideration is if the house is serving your family’s needs, not if it is making you the most money.

Besides that caveat, there’s plenty of ways to invest in real estate.

Here are a few common ways you can make a healthy return off property:

• Purchase a REIT and enjoying the relatively high payouts and potential stock appreciation

• Purchase an exchange-traded-fund composed of REITs

• Buy a property and rent it out, enjoying the monthly cash flow while waiting for appreciation

• Buy a property, upgrade it and sell it quickly for more (flipping)

• Buy a property to live in and rent out a portion of the home, like a room or basem*nt

Why people invest in real estate

There are three main reasons Canadians invest in real estate.

1. Low bar to entry.Real estate investing is so popular primarily because it requires such little knowledge. Almost anyone can figure out how to buy and sell a property and rent it out. There are even firms specializing in managing investment properties, which takes away a large portion of the headache. In contrast, investing in the stock market tends to intimidate people. (Luckily, we now haveautomated investingwhich makes building wealth highly accessible).

2. The power of leverage.Banks are willing to lend out piles of money for real estate at near-historic low interest rates. Mortgage debtreachednearly $1.44 trillion in 2018, almosteclipsingour GDP. But mortgages, a burden on principal residences, are a boon for income properties. Leverage is an extremely useful, albeit risky, tool in investing. Gains are magnified, and so are losses. They allow investors to use very little of their own cash while getting someone else to pay their debt and build their equity. You can use leverage in any kind of investment, but the banks will lend much smaller amounts at higher rates. This factor alone makes real estate investing attractive.

3. Tax benefits.Nothing eats away at returns like taxes. And like most businesses, real estate investing has several tax advantages. Investors can deduct mortgage interest, just like any other sort of investment loan (you could take out a loan to invest in REIT and could deduct that interest too). Investors can also defer income taxes by claiming property depreciation, not to mention write off any expenses for maintaining and running the property.

How to invest in real estate in Canada

If you manage properties yourself, real estate will require an enormous amount of time, money, and hassle. You’ll be dealing with tenants, constant maintenance or construction, and record-keeping expenses. To minimize the hassle, you can hire someone to manage it all for you. Or you can eliminate the hassle entirely by investing in REITs, or real estate investment trusts.

You can purchase individual REITs or a whole basket of REITs through an ETF.

REITs are the lowest-maintenance way to dip your toe into real estate investing. REITs are simply corporations that own swaths of real estate and lease it out to various tenants. They can own apartment buildings, malls or industrial sites. REITs pay out almost all of their taxable income to shareholders, which makes their dividends attractive. The best part is they trade on the stock exchange like any normal security.

The next easiest way to gain access to real estate investing is to rent out a portion of your principal residence. Whether you rent out a room to an international student or create a basem*nt unit, you’d be smart to maximize an asset you already have.

Beyond those two options, real estate investing really depends on your skill set and how much time you have. House flipping is much harder and riskier than television shows pretend it is, and banks have become much stricter in recent years on lending for income-properties. Before you take the plunge do your research.

Risks of investing in real estate

Real estate investing, like all forms of investing, is inherently risky. But there are a few additional risks that real estate investors have to contend with.

A major one that few consider is that the government is more likely to interfere in housing than other sectors of the economy because it’s such a huge issue for voters. Witness 2016, when the Toronto and Vancouver markets were at their red-hot peak.OntarioandBritish Columbiaboth stepped in with measures designed to cool the marketplace. And it worked.

The government could alwaysopen up new areasfor development or flood the market with supply or raise thetax on capital gains. One way to mitigate this is to invest in REITs that only deal with commercial tenants.

Another issue that may arise is interest rate risk, because when it comes to interest rates: What goes down must go up. And when, not if, interest rates goes up so will landlords’ carrying costs. Vacancy rates rising and rents falling could pose a serious problem for investors.

Moreover, property is extremelyilliquid, although this has been tempered somewhat by the popularity of second mortgages. If you need the money back for some reason, you’d have to sell the entire property. You can’t merely sell off a wing of the house.

There’s also an odd notion that property always rises over time. But the past does not guarantee the future. There are many economic forces that can have a negative effect on housing prices, and there are new ones to consider: What if climate change makes certain areasunliveable, or what if asteep population declinereduces demand?

Alternatives to real estate investing

Real estate investing is just one option if you want to build wealth. Securities like stocks and bonds offer a much more liquid place to stash and grow your money and don’t tend to rise or fall with the housing market. And don’t worry: You no longer have to be an expert at understanding p/e ratios or spend time pouring over annual financial statements.Automated investingtakes out all the hassle and the guesswork.

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