Real estate is a classic, versatile, and lucrative way to build wealth. It’s long been a common way for investors to make money, offering opportunities for both active and passive income. Read on to discover different ways to invest in real estate, the perks that come with such investing, and potential costs and tax implications to budget for.
Key Points
- You can make money in real estate in several ways, including renting a property, buying and holding, fractional ownership, fixing and flipping, and purchasing REITs, among others.
- Some real estate investments require a lot of upfront capital, while others are more accessible to those with less money to invest.
- Be sure to consider all costs associated with real estate investing, including potential tax implications.
How To Make Money With Real Estate?
There are many different routes to take to money in real estate. Here are a few that are worthy of mentioning.
Buy Rental Property
Buying a rental property is probably the most well-known way to make money through real estate investment. You can take various approaches:
- Buy a home and rent it to a family
- Split a home into a couple of units and rent them separately
- Purchase a cottage and rent it as a vacation space
- Buy a commercial property and rent it to a business owner
Buying an investment property requires significant capital upfront. It also requires an appetite for risk, as there can be many frustrating setbacks when renting out your property. This includes mortgage financing, maintenance complications, difficult tenants, or a fluctuating market.
Moreover, if you sell a rental property, you need to make sure you’re aware of the capital gains tax.
Learn more: How To Avoid Capital Gains Tax On Rental Property In Canada
Flip Properties
To “flip” a property is to buy it low, fix it up, and sell it at a profit. Investors that take this route are on the hunt for homes that require a lot of renovations, are priced low, and are in a neighbourhood that has the potential to host a higher-priced property.
To flip a house successfully, you need to ensure you have a thorough understanding of the type of renovations needed. You also need an accurate estimate of how much it will cost. This is where there is some risk, as it’s not easy to accurately anticipate this cost.
The best candidate for a flipping investor is someone who has in-depth knowledge about the contracting work necessary to renovate a home, but someone with less knowledge can still flip a house if they do the work and research.
Flipping a house can also be risky if you don’t sell the house right away. Every month on the market is a month of mortgage payments and lost income. To offset this risk, many flippers will live in the house they are renovating as they search for a buyer.
Learn more: House Flipping Tax Rules In Canada
Rent Out Your Own Space
Websites like AirBnb and VRBO have transformed the rental space by offering people a platform to generate rental income without actually purchasing a rental property.
If you have a spare room, or if you don’t mind sleeping on your couch and renting your bedroom, you can access some income by renting out part of your living space. This means you assume some risk, however, as you might not know exactly who you are renting to, and be in an intimate living situation with them.
Invest In REITs
Real Estate Investment Trusts (REITs) give you the opportunity to invest in real estate assets without actually going through the purchasing process of a mortgage and down payment yourself. REIT collects money from multiple investors to purchase multiple real estate properties, often commercial properties.
Investors make their money through dividends, which they can either collect as income or reinvest further. Most publicly traded REITs can be accessed through a broker, while non-public ones can be harder to come by, and harder to value. Like all stocks, however, REITs can fluctuate with the market, so it’s important to assess your risk tolerance before investing.
Learn more: What Are Real Estate Investment Trusts (REITs)?
Fractional Ownership
Fractional ownership involves multiple individuals sharing ownership of a property. Rather than purchasing the entire property yourself, each person purchases a share of it. A management company typically oversees the property, including handling maintenance, tenants, and other tasks.
What To Consider When Making Money With Real Estate
Deciding to try your hand at real estate investing is an easy enough decision to make, given all the benefits. However, there are many important factors to consider before making any financial decisions.
Local Market
Like any market, the housing market can change depending on a city’s circumstances. Housing prices also tend to vary depending on your location. For example, houses in the metropolitan city of Toronto are higher than those in the suburb of Brampton.
Risk Tolerance
Before investing in property, you need to be honest with yourself about your appetite for risk. Real estate can be a risky investment since you aren’t guaranteed consistent income. For example, a tenant might leave without much notice, and you might lose a month or more of rent while seeking out a new tenant. Or, unexpected maintenance costs may flare up.
Liquidity
If you invest in real estate, most of your money is not liquid. That means you cannot access it for your own use whenever you’d like. With money tied up in a property, your spending power can be limited. And if you run into financial trouble, you might have to sell the entire property at an unfavourable price.
Costs
Investing in real estate requires a lot of capital upfront. Down payments are usually 20% of the purchase price, while lower down payments (minimum 5%) result in extra mortgage insurance payments every month. Closing costs to cover a lawyer, provincial and municipal fees and land transfer taxes can also require thousands of dollars before possession of the property.
Real Estate Income And Tax
Taxes can be tricky enough to deal with when you have one steady source of income. Knowing about all of your eligible tax deductions, how much to set aside, and the deadlines for filing can be a stressful endeavour, especially if you don’t have an accountant.
Taxes become a bit more complex when you have real estate income, so it’s important to consider these tax advantages and disadvantages:
| Advantages | Disadvantages |
| Deduct mortgage interest Defer taxes if property depreciates Deduct expenses (maintenance, repairs, etc.) | Capital gains tax Rental income will be taxed |
Should You Use Real Estate to Make Money?
At the end of the day, investing in real estate can increase your financial success. Even though your money will be tied up in a property, the following factors make it a worthwhile investment:
Low Barriers To Entry
Investing in real estate doesn’t require any knowledge obtained from a university or college degree. With careful research and a good handle on your finances, you don’t need a lot of specialized knowledge to invest in real estate. That said, your financial situation could be what stands in the way of investing in real estate.
Build Equity
Money sitting in a bank account doesn’t work for you as hard as a real estate investment property. By investing in a property, you build equity and your money can work for you. For example, you can borrow against your property to buy more properties.
Learn more: How To Build Home Equity In Canada
Diversify Assets
Investors are always cautioned against putting all of their money in one place. Investing in different assets, like mutual funds, stocks, bonds, and real estate can help protect your finances in the event of one asset being compromised.
Final Thoughts
Real estate investment can help bring in extra income, diversify your assets, build your equity, and increase your overall financial health. If you budget accordingly and are disciplined with your spending, conduct enough research on the market, and assess your risk tolerance realistically, investing in real estate can be a lucrative endeavour.
