Make Type:

Larger Smaller Reset

Learning Centre

Investing in Real Estate

By: Hisham Elleithy CFP

Many Canadians dream of owning real estate. While some will be looking at purchasing their first home or adding a vacation property, others will be looking at building a portfolio of properties as income-generating assets, or at buying properties for quick resale at a profit.

If you are thinking of investing in real estate, you need to know a few basics. Just like any other investment, your financial goals, your finances, your risk tolerance and your need for liquidity will be significant factors to consider when making real estate investment decisions. We will review these factors below:

1. Determine your goals: The role real estate will play in your financial goals must be clearly articulated: Do you want to invest directly in real estate properties or are you looking to simply diversify your investment holdings through investing in real estate investment funds? How quickly you need to be able to liquidate your investments in case of an emergency? What is the extent of the commitment, both personally and financially that you are willing to make to manage your real estate properties?
2. Understand your finances: Your ability to invest in real estate depends to a large degree on your ability to finance the properties so your income and net worth will be important determining factors. In addition, you should be aware of the costs involved in real estate investment including appraisal and inspection fees, legal cost, taxes including land transfer tax and provincial tax, and insurance costs including default insurance, title insurance, and home insurance. Other costs include repairs, renovations and maintenance costs.
3. Know the risks: If you thought real estate values always go up, think again. Real estate values can in fact go down since their values are tied in many ways to economic variables such as interest rates, demographics and taxation. For rental properties, risks include inability to find suitable tenants, changes in relevant bylaws and changes in tenancy legislation.
4. Review your options: If you want to invest in real estate but are apprehensive of the large financial commitment and/or the tedious process of owning actual real properties, there are other options that you can consider, namely:
• Real Estate Income Trusts (REITs): REITs hold income-producing properties, such as retail or office properties, and regularly distribute their net taxable income to their holders.
• Real Estate mutual funds: They are specialty funds that invest in shares of real estate companies with no geographic restrictions. You should note that there are time restrictions on redeeming units from these funds because the valuation of their holdings is done periodically.
• Exchange-Traded Funds (ETFs): ETFs hold a pool of securities that closely tracks a market index in the real estate sector. ETFs trade on the stock market just like any publicly traded company.
• Shares in real estate companies: You can buy stocks of individual companies that hold portfolios of retail, office or industrial real estate properties.

In conclusion, investing in real estate can be used as a strategy to diversify your existing holdings, or it can be a full-time business with substantial personal and financial commitment. It is therefore important that you review your personal as well as financial goals, and have a clear understanding of the risks involved in these types of investments.