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With careful research and planning, investing in real estate can be a solid source of income, as well as a good way to diversify your assets. Whether you’re buying a rental property or putting up your spare room on Airbnb, real estate offers many options for you to earn extra income

However, there is a lot to learn before investing in real estate, including tenant laws in your area, tax implications, loans, mortgages, interest rates, capital gains, and much more. Read on to find out how to invest in real estate in Canada. 

Key Points

  • Real estate investing has long been a sound way to invest and should be considered as part of a diversified investment portfolio.
  • There are several ways to invest in real estate, including renting, buying and holding, and fixing and flipping, to name a few.
  • Real estate investment trusts (REITs) provide an alternative way to invest in real estate without owning and operating a property.
  • Fractional ownership can lower the financial barrier to real estate investing.

How To Invest In Real Estate In Canada

Real estate is a diverse type of investment. There are many avenues to take when investing:

Renting Out Your Property 

The most common way to invest in real estate is to buy a property and rent it out. You can rent the entire property, or rent out a portion of the home you live in. The trick is to find a property with monthly expenses (mortgage, insurance, maintenance, etc.) that can be consistently covered by the monthly rent collected. 

With rental properties, you need to be mindful of the time spent dealing with tenants and managing repairs and maintenance. Otherwise, you may need to budget for costs associated with hiring a property manager if you choose not to manage the property yourself.

Flipping Properties

Adding equity into a home by updating it is another potentially profitable way to invest in real estate. “Flipping” homes involves buying a property in need of updates, renovating it to quickly add value, then selling it for more than the original purchase price and renovation costs. 

One important consideration of flipping properties is that you won’t have rental income helping you pay off the mortgage. So, you’ll be faced with both renovation costs and mortgage costs. This is why it’s important to finish the renovations and sell the property as soon as possible to minimize carrying costs. 

It’s also dependent on an active and bullish real estate market — in a downturn like 2008, flipping a home could be difficult. Keep in mind that you may also have to pay capital gains tax on the sales proceeds. 

Buying And Holding

Another approach to flipping a property is to avoid renovations altogether. In soaring housing markets like Toronto’s, for example, home prices keep going up. Some investors might buy a piece of real estate and hold onto it for a while before reselling at a higher value in the future, matching the rising market prices. 

Short-Term Rental

Short-term rental platforms like Airbnb offer property owners a smaller time and financial commitment. If you are often away from home, you could rent out your property to vacationers. Using a site like Airbnb and the like may be the safest way to do this, as they offer protection in the event of damages.

Investing in REITs

REITs, or Real Estate Investment Trusts, are investment companies that own or operate commercial real estate, like office buildings, medical centres, warehouses, retail stores, and large apartments. 

REITS are a common retirement investment because they often pay out high dividends, usually on a quarterly or monthly basis. These dividends can be used as income or automatically reinvested.  

Publicly traded REITs are recommended for new investors and are available for purchase through brokerage firms. You can also access diversified portfolios of multiple REITs via mutual funds or exchange-traded funds (ETFs).

Fractional Ownership

If you can’t afford to purchase a property on your own, consider fractional ownership. As the name suggests, fractional ownership involves owning a portion of a property. With this approach, you would pool your money with other investors to purchase a property. 

Fractional ownership can look like any of the following:

  • Owning a portion of a property and earning a fraction of the cash flow and appreciation.
  • Owning a stake in a company that manages a real estate development to take advantage of capital appreciation.

Fractional ownership not only allows you to get into the market with less capital, but it also lets you diversify your investment properties. 

So, rather than buying multiple properties in full (which would require substantial capital), you can own a portion of several properties. This is a great way to diversify your assets to minimize risk and maximize earning potential.

An increasing number of companies are making it easy for Canadians to invest in fractional ownership, including BuyProperly and addy.

Advantages Of Investing In Real Estate

There are many reasons why purchasing real estate is a popular choice for consumers looking to invest or diversify their investment portfolios:

Tax Benefits

Like any business, investing in real estate comes with many costs that you can deduct from your income, and thus receive a higher tax return. You can potentially deduct the following real estate expenses from your income:

Tenants Pay Your Debt And Build Your Equity

With monthly income from tenants’ rental payments, you essentially have a property that’s paying off its own mortgage. This also allows you to build your equity without having to set aside thousands of dollars every month to pay a mortgage. 

Leverage

Real estate investments offer buyers leverage. You can use borrowed capital to invest in a property without having to contribute much of your own capital upfront. 

Many real estate investors use this leverage to borrow against property or take out a second mortgage to secure a down payment for a second investment property. 

Then, you can have multiple properties with mortgages paying themselves off. This builds equity despite having paid only a small portion of the total value of the property.

Diversification

Have you ever heard the phrase advising you to “diversify your assets?” This is an important piece of financial advice, as it protects you in the event that one of your investments is unsuccessful. 

If your investments are different — or diversified — you have a better chance of financially surviving a recession or stock crash because you didn’t put “all your eggs in one basket”. So, adding real estate, for example, to an investment portfolio can protect you financially via diversification if stocks don’t do well.

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Disadvantages Of Investing In Real Estate

Like every type of investment, there are downsides and risks involved along with the benefits. Here are a few disadvantages of investing in real estate:

Larger Down Payment

Lenders typically require a larger down payment for a real estate investment. This is especially true for commercial real estate, for which lenders often require a whopping 40% down payment. This is often why investors purchase a property with others so they can pool their capital to come up with a sizable down payment

Capital Gains Tax

When you purchase a property with the intention of living in it, you can sell the property (even if it appreciates in value) and keep all profit. For example, if you purchase a home that you make your primary residence for $500,000 and resell it a few years later for $600,000, you earn a clean $100,000 in profit, or “capital gains”. You would not need to declare it as income on your taxes when you sell. 

However, selling a property that is not considered your primary residence would require you to pay capital gains tax if you sell for more than what you paid for it. Right now, 50% of any capital gains are taxable and need to be added to your income come tax season. However, this number will jump to 66.7% as of June 25, 2024 on capital gain amounts over $250,000. Depending on your income, adding capital gains can significantly increase the amount of taxes you pay. 

Government Interference

Since housing is a top priority when citizens vote, governments are more likely to interfere with the laws and regulations surrounding investment real estate property. For example, the government can increase the tax on capital gains, increase interest, or introduce other tools to regulate the market, all of which can affect your income from your real estate property. 

We’re already seeing this play out. As mentioned, the federal government has recently announced that it will increase the portion of profits that real estate investors would have to pay capital gains tax on, effective summer 2024.

Increased Interest Rates

Interest rates tend to be higher for mortgages on investment properties, thus creating higher costs for landlords every month. Make sure you shop around and compare rates from different lenders to secure a reasonable interest rate. You can quickly do so using a loan comparison site like Loans Canada.

Vacancy Rates 

Another risk of investing in real estate is vacancy. In between tenants, or during the period you are seeking out a tenant, you will have to carry the cost of your mortgage without the assistance of rental income. 

This will happen every so often, as tenants come and go. It’s good to prepare for some rent-free months so that you’re not financially strained when you have to pay the mortgage out-of-pocket. 

Problem Tenants

Investing in rental properties also comes with the risk of problem tenants, who may cause damage, fall behind on rent, or in severe cases, squat without paying rent at all. These issues can lead to significant financial and legal headaches. 

To mitigate these risks, consider hiring a professional property management company to handle tenant screening and day-to-day management. 

Additionally, ensure you have comprehensive rental agreements in place and conduct thorough background checks on all potential tenants.

Things To Consider When Investing In Real Estate In Canada

Before you purchase a property for investment purposes, be sure to keep the following in mind:

Type Of Property

Depending on your available capital and investment goals, you’ll want to consider the type of property to buy. For instance, most newbie real estate investors with limited capital often consider buying a condo to rent out. 

However, you may also consider single-family homes, multi-plex units, and even larger properties or commercial units to suit your real estate investment goals. 

Location

When it comes to real estate, location should always be a top priority. For instance, a good location will attract quality tenants and increase property values. 

When buying real estate for investment purposes, make sure to focus on areas where rental demand is relatively strong and properties maintain their value over time.

Local Job Market

A robust labour market will drive demand for housing and can contribute to higher rental income. People tend to flock to areas where there are plenty of employment opportunities. This can increase demand from renters and eventually home buyers (if you choose to sell in the future).

Local Rental Market

If you’re planning to rent out your property, you’ll want to make sure the rent you charge will be enough to cover your operating costs. As such, check out the average rent in the area. You’ll also want to find out how many rental properties are available for sale in the neighbourhood, as this will affect the price you’ll pay to buy the property.  

Your Investment Goals

Does the purchase of a specific property make financial sense for you? Ultimately, the goal of real estate investing is to realize a good return. 

Whether you choose to sell your property quickly for a profit or hold your property long-term, make sure you consider whether your investment will provide a positive return. Further, compare the potential return to other investments.

Local Housing Laws

The by-laws in your area could have a direct impact on your investment. Before buying a property, be sure to familiarize yourself with local housing regulations. You should also understand the rules of a particular housing complex, such as a condominium, to find out if they will impact the type of investing you’re getting involved in.

For example, if you want to buy a condo and rent it out, you’ll need to make sure there are no rules that prohibit renting. If renting is allowed, you need to find out if there are limits on the percentage of units in a complex that may be occupied by tenants versus owners. 

You should also get to know landlord and tenant rights in your area. In Ontario, for instance, leases are heavily regulated. Understanding what these regulations are will ensure you remain in compliance to avoid legal issues. 

Final Thoughts On How To Invest In Real Estate In Canada

Real estate investments require a lot of time, planning, and capital upfront. However, with so many investment options, real estate is a great way to secure a second source of income and build equity. 

FAQs On How To Invest In Real Estate In Canada

Are there ways to simplify the real estate investing process?

While real estate investing requires a big financial commitment, you can streamline the process by working with industry professionals or using one of many real estate apps available. Many of these handy apps are free, while others charge a nominal fee.

What’s the most common way to invest in real estate?

The most popular way to invest in real estate is to own a rental property. This way, you can collect a regular income through rent while befitting from an increase in value over time.

How do I invest in real estate with little money?

If you don’t have a lot of capital to buy a property, consider fractional ownership. This allows you to own a share in a property without having to buy it all on your own. You can share the capital appreciation of the property and the rental income with other investors.

Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.

Chrissy Kapralos avatar on Loans Canada
Chrissy Kapralos

Chrissy is a Toronto-based communications advisor. With an English degree from the University of Toronto and editing courses under her belt from Ryerson University, she has continued her lifelong passion for writing and editing. In addition to working for Loans Canada on a variety of financial topics, Chrissy has a few years of resume writing and editing under her belt, and takes great pleasure in helping people find work that fits with their experience and passions. When she isn't working, you can find her practicing yoga, hanging out with her dog, reading up on financial and real estate news, or planning her next trip abroad.

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