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Making Money With Real Estate
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In Canada, there is a direct link between property ownership and financial success. Specifically, Statistics Canada reported that the income of those who owned property had been shown to be “considerably higher” than the income of those who didn’t. This rings especially true for more metropolitan cities like Toronto and Vancouver for example, where Statistics Canada reported were the locations of most Canadian multiple-property owners. It’s no wonder almost half of Canadians are hoping to invest in real estate in the near future. It’s a sure investment, with almost promised income through appreciation, rental income, diversification of assets, and more.
How to Make Money With Real Estate?
With such great investment potential, Luckily for us, there are many different routes to take when it comes to making money in real estate.
Buy Rental Property
Buying a rental property is probably the most common way to make money through real estate investment. The possibilities are endless – you can buy a home and rent it to a family, or perhaps split a home into a couple of apartments and rent them separately. You can purchase a cottage and rent it as a vacation space, or commercial property and rent it to a business owner. Buying an investment property requires significant capital upfront, as well as an appetite for risk as there can be many frustrating setbacks when renting out your property, such as maintenance complications, difficult tenants, or a fluctuating market.
Learn how to refinance your rental property mortgage.
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, as well as 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.
New to investing? Check out our beginners guide on investing.
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 downpayment yourself. Often compared to a mutual fund, a REIT collects the 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.
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.
Like any market, the housing market can change depending on a city’s circumstances. For example, Canadian housing prices rose during the COVID-19 pandemic, while rental prices dropped as a result of the same pandemic. 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 Brampton.
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 on a month or two’s rent while seeking out a new tenant.
Check out why you should get landlord insurance.
If you invest in real estate, most of your money is not liquid, meaning 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.
Learn how to cover expenses by borrowing money using your home’s equity.
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 taxes can also require thousands of dollars before possession of the property.
Learn how to put together money for a down payment.
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 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:
|Tax Advantages||Tax Disadvantages|
|Deduct mortgage interest||Capital Gains Tax – adds 50% of your capital gains, or profit, to your income to be taxed|
|Defer taxes if property depreciates||Rental Income will be taxed|
|Deduct expenses (maintenance, repairs, etc.)|
|First Time Home Buyers’ Credit|
Check out these 6 tax breaks for homeowners.
Should You Use Real Estate to Make Money?
At the end of the day, investing in real estate will increase your financial success. Even though your money will be tied up in a property, factors like rental income, appreciation and diversification 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.
New to investing? You should consider investing using robo-advisors.
Money sitting in a bank account doesn’t work for your financial success 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.
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.
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.
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