Should You Invest in Real Estate?

| Investing

When it comes to financial investing, there are many factors to consider. Cash upfront, the risks, and of course, the long-term gain. Investing in real estate is a tempting prospect with a range of options ranging from zero effort to major effort. But is investing in real estate worth it?

The answer to your burning question depends on the type of investment. So how do you invest in real estate?

Below, we’ve outlined the types of residential real estate investments and how to start investing in real estate whether you’re new to investing or a seasoned investor ready to expand your portfolio. Let’s jump in!

How Do You Invest In Real Estate?

Investing in real estate is all about finding a strategy that works with your budget and wealth-building goals. Here’s your basic options:

The Flip

Likely the most glamourized investment option when investing in real estate, numerous television shows make flipping look like a breeze. All you need is good taste (which is very subjective!), a contractor (you can trust), and a willingness to get your hands dirty…right? Well, yes, but that takes a lot of time and money, AND you need to complete a newly renovated turnkey home that passes inspections to see the highest gains.

Flipping is a good real estate investment when:

You’re a seasoned DIYer willing to roll up your sleeves to complete projects PROPERLY, happen to have a handy friend or contractor in the family, or can snag a discount on labour in some way! The cost of materials, contractors, and designers will eat into your profits fast, so you need to find deals, whether it’s by doing a lot of work yourself or working with a contractor or designer with trusted connections that can offer some serious discounts.

Proceed with caution if:

You’re inexperienced with renos or can’t do the labour yourself as you’ll be forking out funds for materials, an interior designer, and/or an experienced contractor to oversee the process.

Considerations:

  • Ideally, you want a property that’s outdated and unloved so you can make minimum investment on paint, counters and tiles, flooring, etc. You pay a higher price for the property but avoid expenses for major materials and trade experts to help ensure a higher profit.
  • First-timers should avoid purchasing a home ‘as is’ with serious risks like mould, rot, structural issues, etc., that could cost a fortune, cause delays that force you to make more mortgage payments than you planned and blow your budget.
  • Competition is stiff for fixer-uppers, so listen to a savvy real estate team like us to decide if you can risk waiving the home inspection.
  • Time wise, you’ll put in lots in the short-term and zero in the long-term.
  • You can use your profits for a down payment on your next flip and so on.

Learn more about flipping and selling with these posts next:

Condos & Landlords

Purchasing a condo can offer long-term gains from rent to pay off your mortgage. You then just have to manage the maintenance fees and any unit repair costs with the majority creating long-term cash flow. On top of that, you can keep an eye on your equity building or sell when the market and/or your situation calls for it.

You have two choices:

  1. Resale Condo: Pre-owned condos work as long as they aren’t too old. You’re more likely to face costs like appliance replacements AND pay higher maintenance fees for older units, which are factored into your rental price. When rent is above the neighbourhood average, you’ll have a tough time finding a tenant even when inventory is low. BTW, if you’re considering a fixer-upper unit, be prepared to face the condo board for approvals.
  2. The Pre-Construction Condo: Pre-construction condos are known for their beneficial payment schedules, lower entry prices, and low competition. Buying pre-construction can face delays that disrupt your plans. The bonus is that you can select a killer building and unit with a good layout, views, and of course neighbourhood to take advantage of a higher rent with low upfront costs. Better yet, your down payment is split over the range from the purchase date to close, so you have less of a financial commitment while looking at some equity building over the 2-3 years it takes to occupy the condo. Oh, and did we mention there are also no bidding wars with pre-con, so what you see is what you pay?

Condos are a good investment when:

You are fine with the idea of being a landlord AND have tenants, of course. Landlords lose money if a) they don’t have a tenant to cover their mortgage or b) they sell below what they paid. Condos reduce the worry of extensive property maintenance like lawn and exterior upkeep. As long as you get the right price in a high-demand rental neighbourhood without too high of a maintenance fee, you can cover your mortgage and sell for a profit.

Proceed with caution if:

You’re buying resale and the current rental market is saturated with units.

Considerations:

  • Although Toronto properties have shown a consistent rise in value throughout history, you need to understand the condo market and how current trends impact your costs, maintenance fees, borrowing rates, and average rent to ensure all costs are covered and you can build equity.
  • Speak to a real estate team that specializes in condos to understand the average price per square foot of a resale condo versus a pre-construction condo and maintenance fees. You want to find the best deal, so you pay less money up front and are more likely to see your unit increase in value.
  • The condo corporation is responsible for maintaining common areas, landscaping, window washing, etc., making a condo a much lower maintenance rental option than a house. You have to balance that with the fees you pay to cover those services. Being a landlord is a BIG responsibility, so you’ll have to ensure that you’re readily available when issues arise or have someone who is when you’re out of town.

There are other costs associated with buying pre-con (like closing costs and developer levies), read: The Guide to Buying a Pre-Construction Condo to learn more.

Do you have more questions about being a landlord or owning multiple properties in Toronto? Check out these posts next:

The House

If you’re fortunate enough to afford a house in the city, there are many benefits to this type of investment. If the property is large enough for multiple units, you may have the option for more than one rental income stream. Better yet, if the property is already zoned/equipped with multiple units, you’ll save the upfront cost of renovations and permits. Although purchasing a house is a larger cost up front, you can work with a real estate agent to find the best areas, benefit from the rent, put away some savings towards your next investment, and make a large profit if you hold onto your property long term (whether you’re personally living in it or not!).

Houses are a good investment when:

Whether the house is a multi-unit dwelling or just has a lower-level apartment, you have the option of renting part of the home and residing in another part of it yourself to supplement your mortgage. This also offers the option of splitting utilities and internet with your tenants, bringing living expenses down. Nice! It is also good for those fine with being a landlord for a multi-unit home with time and money to manage ongoing maintenance.

Proceed with caution if:

The home you purchase is a single-family property, you will need to factor in the time, money, and permits required to convert it into a multi-unit dwelling.

Considerations:

  • How will living with a tenant impact your quality of life and enjoyment of your home?
  • You’ll be responsible for all maintenance, late-night leak phone calls, and, of course, any possible noise/mess complaints from neighbours.
  • A property manager can make life easier BUT will also eat into your costs.

Learn more about building wealth through real estate with these posts next: 

Real Estate Investing Tips

Here are a few more things to keep in mind:

  • Flipping is a short-term pain/gain situation as long as you feel confident you can either do quality work yourself OR make a profit working with professionals.
  • Rent is INCOME, meaning you’re obligated to pay tax on any monthly earnings you make on the property, even if you live there. For example, if your mortgage and maintenance costs are $2600 and you’re renting your property for $2800, you must pay tax on the $200 so hire an account to leverage tax deductions.
  • If you choose to rent out your property, you’ll need to consider the monetary and time commitment of being a landlord. Becoming familiar with The Landlord and Tenant Board is a must, especially when it comes to matters like finding a suitable tenant (we can help with that!), creating a rental agreement, raising the rent, and evicting tenants.
  • If you plan to cover your mortgage and leave your property vacant until you decide to sell, keep in mind you will be charged an annual 3% Vacant Home Tax (VHT) based on your property’s current assessed value on top of your annual property taxes.
  • Renting to short-term tenants through Airbnb or Vrbo is a no-go in Ontario, where you have to register, pay a Municipal Accommodation Tax (MAT) of 4–8.5%, and legally occupy the home as your principal residence, and even then, there is usually a 180-day cap. Just saying.

Bottom Line

So, should you invest in real estate? Yes, if you:

  • Have the minimum 20% down payment required for a second property,
  • Are a talented DIYer who wants a short-term investment that doesn’t require ongoing care and can tolerate more than a few mortgage payments on your own during the flipping process,
  • Can put up with a tenant living in your home to help cover the mortgage, or
  • Are okay with being a landlord, either for a low-maintenance condo or a higher-maintenance multi- or single-unit house.

If you’re ready to invest in real estate, or if you’re thinking about cashing in on a real estate investment you already have, The Christine Cowern Team is here to make the process easy. Get in touch with us today by calling us or emailing us directly.

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