As a real estate investor, you might often wonder how you can make huge money without much work. If you want to learn about investing in houses and how it can help your situation, keep reading.
Real estate is the only investment that grants enormous freedom to the investor. One cannot buy gold and keep it locked in a vault; similarly, you cannot buy a house and lock yourself into it, forgetting that it has value. You must know how to buy real estate and how to manage it.
Even if you aren’t ready to start your investment yet, this article will help you better understand what is involved in real estate investment trusts. Let’s get started.
Things to Consider When Buying a House
Buying a house is one of the biggest financial decisions you’ll ever make. You need to think carefully about whether you’re ready and able to buy a home and what type of property will work best for your needs.
It’s important to ensure that your home will be a good investment — not just now but in the long run.
Buying a house is expensive, and incurring debt will increase your overall expenses. Before you take out a mortgage loan, make sure that you have considered the following factors:
Economy
The housing market can be volatile, so it’s important to consider the state of the economy when making this decision.
So, if you’re looking to purchase a home in the next few years, you should pay attention to the economy. The housing market is highly sensitive to economic changes, for example, when there’s a recession or an economic boom.
If the economy is doing well and unemployment is low, it may be easier to sell your home if you need to move. However, there may be more competition for homes and higher prices during high unemployment.
Debt-to-income Ratio
Your debt-to-income ratio is the amount of money you spend on housing compared with your total income.
When comparing mortgages, lenders will look at your debt-to-income ratio (DTI) — how much money you make per month compared with how much money goes out each month for debt or mortgage payments like student loans and credit cards.
If your DTI is too high, some lenders won’t approve your loan application because they think it’s risky.
However, cash is always the best option when purchasing real estate, so if you have the funds available, go ahead and make the purchase.
Housing Market
The real estate market may be hot right now, but that doesn’t mean it will be forever. Make sure you know how long it has been since the last crash to gauge whether this is a good time to buy.
The housing market is a complex, dynamic, and constantly changing world. Knowing what you are getting into before investing in a house is important.
Hence, check out the housing market in your area. Do people sell their houses? If so, how quickly do they sell? Is the average price of homes going up or down?
Lifestyle
Where do you want to live? What type of home do you want? Are there any areas with more crime than others? What kind of commute will we have? These are all questions that should be answered before jumping into homeownership.
Before investing in a house, considering your lifestyle is important because you are buying a house for a long period. Your primary residence should be able to accommodate your lifestyle and needs.
Rent or Buy
The next factor in buying a home is deciding whether buying or renting is better for you.
If you’re planning to stay put for several years, buying may make sense because it allows more flexibility than renting, which can be difficult if your job or family needs to change unexpectedly.
If renting makes more financial sense than buying, then don’t feel pressured into buying just because it seems like everyone else is doing it!
House Flipping
House flipping is the practice of buying, renovating, and reselling a home. The goal of house flipping is to make a profit by buying a property at a low cost, increasing its value, and selling it at a higher price.
House flipping can be risky because it requires extensive renovations, which may end up costing more than expected.
The process of flipping homes is not as simple as buying a property and immediately selling it for a profit — there are several steps involved in flipping houses. Here’s how to flip a house:
- Choose your property
- Make repairs and upgrades
- Market your property to sell fast
- At closing, the buyer takes possession of the property.
When flipping a house, it is important to focus on a property’s after-repair value (ARV). You can get this price when it’s fixed and ready to sell.
The 70%-rule is a common way of calculating ARV. The rule states that you cannot pay more than 70% of a property’s after-repair value (ARV) minus the cost of repairs. You want your profit margin to be at least 70% of the purchase price.
Another key to successful house flipping is finding a motivated seller. If you can’t find someone who needs to sell their home quickly or sell below market value, then you won’t be able to get the deal done at all.
Knowing how much houses typically sell for in your area is important when considering house flipping as a real estate investment strategy.
Buy-and-Hold
Buy-and-hold strategy in a real estate investment trust is a long-term strategy that many investors use to build wealth.
The main idea is to buy a rental property and hold it until there’s an opportunity to sell it at a higher price.
For example, if you buy a house for $200,000 and then sell it a year later for $250,000, your return would be 25 percent. This means that you made $50,000 in profit on your initial investment of $200,000.
Generally, a buy-and-hold real estate investment should yield 9 percent annually.
The buy-and-hold strategy has been very popular in the past decade because of low-interest rates and stable prices in many markets.
It’s also been used by many homeowners who have refinanced their mortgages multiple times over the years to take advantage of lower interest rates each time they refinance their mortgage loan.
You have many alternatives regarding the kinds of homes and other properties you could buy for this objective.
Apartment buildings
- Townhouses
- Condominiums
- single-family homes
- Vocational rent houses
- Commercial properties
If you live in Toronto, you can consult a real estate agent or professionals like a Toronto property management company to help you find the right property for your needs.
Remember that you have a better chance of getting the most out of your investment if you hire a Toronto property manager, even if you can manage the property yourself.
The Hybrid Strategy
The Hybrid Strategy combines the Buy and Hold Strategy and the Flipping Strategy. It is also known as the Flip to Rent Strategy.
The Hybrid Strategy aims to buy properties that can be rented out for long-term profits. This means that you will not have to deal with any tenants or repairs, but you will still gain from an appreciation of the property’s value.
Step 1: Buy a Fixer-Upper
To follow the Hybrid Strategy, you will need a property that requires some work. This can be an out-of-date home, a fixer-upper or even a foreclosure. While there are risks involved in purchasing these properties, the potential for reward is much greater.
In either case, the first step is to get an inspection done on the property and find out what work will be required before you buy it.
Step 2: Perform necessary repairs and updates
Once you have identified your property, it’s time to start making changes. Depending on the property type and its condition, this process could take a few weeks to several months.
Step 3: keep the property for the foreseeable future.
The next step in this strategy is to hold your property for some time and find a tenant who will pay market-rate rent.
Once you have found a tenant who pays their rent on time, you can increase your rent by 10% or more.
This will help you recover the money you have consumed by paying for your property’s repairs, utilities, and maintenance.
Step 4: Sell the property at an increased value
The final step is to sell your property once it has been paid off completely and move on to bigger and better things!
We recommend using a real estate agent specializing in selling homes that have gone through extensive remodeling projects like yours.
They must also have experience marketing similar properties because they’ll know what buyers want when viewing homes online or touring them in person.
The Joint Venture
A joint venture is an agreement that allows two or more people to pool their resources and expertise to buy or sell the property.
The benefit is that each partner contributes different skills and knowledge, allowing them to make more money than if they were working alone.
In real estate terms, this could mean one person focusing on finding properties that fit their target demographic.
In contrast, another focuses on finding good tenants who will pay rent on time and maintain the property well.
Joint ventures can be beneficial in several ways:
- Share risk and reward.
- Reduced costs
- Easier management
Rent-to-Own
Rent-to-own real estate is a leasing agreement where the tenant pays rent every month but has the option to purchase the property at any time during the lease period.
Rent-to-own contracts are typically structured so that the tenant pays rent on the property over a year or two, with an option to buy the property at the end of this period for a predetermined price.
Investors gain from this method because they can generate higher returns than they would receive from renting out their properties.
This is because they charge a higher rent than the going rate for the area, and the buyer must be okay with this.
Residential Rental Income
This is perhaps the most common way that people invest in real estate. Buying and renting a home can earn monthly income while building equity over time.
The key to success with this strategy is finding a property you can rent for more than its purchase price.
Once done, you must manage the property and collect your monthly rent checks. This can be very rewarding because it gives investors a predictable income stream with little work involved.
Commercial Rental Income
Commercial rental income is the revenue you receive from renting your commercial property. Commercial properties include office buildings, retail spaces, and industrial warehouses.
The amount of rent you can charge will vary depending on the location of your property and its size. The larger the property, the higher the rent you can charge.
However, it is not as simple as buying a property and renting it out. You will need to deal with different types of tenants and their requirements.
Before investing in you, you must know what kind of commercial rental property you are dealing with.
There are many types of commercial properties available for investment:
Retail
Retail property is any commercial real estate used for retail purposes — such as a shopping mall, restaurants, cafes or grocery stores.
Retail properties are typically owned by investors who rent out the space to retailers and other tenants.
Office
Office buildings are often rented out by their owners to companies that need space for their employees to work in.
The companies usually pay monthly rent and may also pay extra fees if they want additional services such as electricity or water usage included in their rent payments.
Industrial
Businesses that require storage space use industrial properties such as warehouses and storage units.
These properties are typically used as storage facilities for companies that manufacture goods or distribute products on a large scale.
Investing in Real Estate vs Stocks
Investing in real estate is more like an art than a science. It’s not like investing in stocks where you can follow the news and the market, buy and sell based on what’s happening and make money.
Real estate investing is about buying properties that will appreciate over time and then managing them to ensure they increase in value over time.
Key differences between investing in real estate and the stock market are:
- Real estate is an investment vehicle that provides a passive income stream through rental properties or other means, such as flipping houses for a profit.
- Real estate offers tax advantages and long-term growth potential for your portfolio compared to stocks.
- To make money on stocks, you need some knowledge of finance and investing strategies that can help you identify stocks that are likely to increase in value over time.
- It can be challenging to sell certain types of real estate property.
Advantages of Investing in Real Estate Investing in Canada
Real estate is an excellent way to build wealth and create passive income. It’s also a solid investment for those who want to retire early.
Real estate offers some advantages over other types of investments, including:
Diversification
Real estate investing is one of the best ways to diversify your portfolio. While stocks and bonds have their place in an investment portfolio, they are limited in their ability to protect against economic downturns and inflation.
Real estate investments help protect your finances from all these factors because they’re tied to the value of the real property rather than fluctuating company stocks or government debt.
Your Money Works For You
Real estate has historically been considered a safe asset class because it doesn’t move as much as other investments such as stocks or mutual funds.
This means that your money works for you instead of being tied up in an investment that may not do well in a down market situation – like stocks or mutual funds can do when they have a bad day or week!
With rental properties, your cash flow will grow as rent increases.
Tax Breaks
In Canada, tax-based incentives are available for landlords and tenants (such as capital gains tax exemptions). This can help lower your property taxes bill each year while increasing the overall value of your property as well!
Real Estate Can Be A Hedge Against Inflation
Inflation is one of the biggest threats facing investors today. It can lead to a loss of purchasing power over time.
The value of real estate tends not to increase as quickly as the value of stocks does during times of inflation because it’s harder for buyers to afford homes when everything else costs more, too (including wages). This makes real estate a natural hedge against inflation.
Potential Risks When Investing in Property in Canada
The risks of real estate investing in Canada are significant. The failure rate of new investors is high, and many go broke.
However, it is possible to succeed. It requires careful planning, research, and due diligence.
Here are some of the risks you should be aware of:
Time-Consuming
One of the biggest risks of investing in real estate is that it takes time. You must find suitable properties, arrange to finance, negotiate with sellers and contractors and manage the sale process once it’s complete.
That’s not including all the time required to look for properties in the first place.
Vacancy & Rentals
Vacancy and rentals can be another risk. If you’re renting out your property, you’ll have to spend time finding good tenants and then managing them after they move in.
Even if you own real estate like a condo or house built recently, there’s always a chance that it won’t sell or rent quickly enough for you to turn a profit on it before interest rates rise or the market softens again.
Mistakes Can Be Costly
Investing in real estate takes research and preparation — and sometimes even luck. If you don’t do your homework or don’t ask enough questions before making an offer, you could buy something unwanted or overpay for a property.
Requires Money Upfront
You’ll need more than an idea to start real estate investing.
You’ll need enough cash for down payments, closing costs, and repairs — potentially tens or hundreds of thousands of dollars — depending on how much you want to invest in each property and how much risk you’re willing to take on.
Market Crashes
The most obvious risk is that the market can crash. A market crash occurs when prices drop significantly and buyers become highly selective, ripple effect on other market aspects, such as inventory and sales activity.
Investors buying higher-priced properties may find themselves underwater on their mortgages if they have not sold their properties yet.
FAQs
How Do Rental Properties Make Money in Canada?
The answer is simple: cash flow. The more you can make from your rental property, the more money you will make on your investment.
Cash flow is the amount of money your rental property generates after expenses are taken out.
The cash flow you receive from a rental property is what you use to pay for your mortgage, make improvements to the property, and pay off any debts you have associated with the property.
How Should a Beginner Invest in Canada?
If you are new to investing in Canada, you must know that several types of investments are available.
You can invest in stocks, bonds, mutual funds, ETFs, and real estate. The best way for beginners is by investing in stocks and bonds because they are low-risk investments with a high chance of paying off if you do your research.
Can Foreigners Invest in Canada Real Estate?
If you’re a foreigner considering investing in Canadian real estate, you may wonder whether or not that’s possible. The short answer is yes: Foreigners can invest in Canadian real estate if they are legally allowed to do so.
However, the government of Justin Trudeau announced a two-year moratorium on foreign investors in Canadian real estate on April 8, 2022.
Which City in Canada Is Best for Real Estate Investment?
The best city in Canada for real estate investment is Toronto. This city is a great place to invest because it has a stable economy, low unemployment, and high population growth.
In addition, Vancouver is also an attractive option for real estate investors because it offers several incentives for new homeowners looking to purchase their first homes.
Final Thoughts
Overall, real estate investment seems attractive for many people from a financial perspective. But before you get ahead of yourself, make sure you understand the risks involved and that you are comfortable with the idea of taking real estate classes.
Investing in houses isn’t a decision that should be made hastily. With so many options available, it is hard to be sure you are making the right one. We hope this article helped you make the decision you needed to make.
