Not all investing is stocks and bonds, mutual funds, and ETFs. Real estate offers a reliable track record of solid financial returns, with multiple income-generating options for investors to consider. In some cases, tax breaks sweeten the deal.
Of course, even with property prices soaring, making money in real estate isn’t always straightforward, and it’s important to know what you’re getting into before investing in a house or property of any kind.
If you’re interested in investing in real estate, it’s also a good idea to familiarize yourself with some of the different ways people typically put their money to work, while also taking time to consider both the benefits and potential pitfalls.
Three ways to invest in real estate
The first way is simple: purchase a property and hope to benefit from appreciation, meaning the price rises during your ownership and you sell at a profit, preferably a handsome one. Some buyers purchase properties never intending to live in the place, only ever intending to sell (or flip) it, sometimes after a renovation.
Alternatively, real estate investing can generate cash flow income if you put your money into a rental property whose tenants pay you a regular fee to use the place. These could be residential renters or commercial tenants. Another option is to list your property on a platform for short-term renters, such as AirBnB.
Of course, it’s also possible to live in the same property you rent, whether it has a separate unit for tenants, or you simply rent a room in your own home. Either way, you can use the income to offset the cost of ownership. This is a highly effective strategy many first-time homebuyers use to finance their purchase, with some finding it an eye-opening introduction to the income possibilities of owning a rental property.
Finally, if you don’t have the cash to finance a property purchase, that doesn’t mean you have to be shut out of the game. Real estate investment trusts (REITs) offer an opportunity for individuals to generate income from real estate in a different way, by investing in companies that own and operate large scale income-generating properties such as shopping malls, apartment buildings, office buildings, and hotels.
As with any investment, it’s good to know what you’re getting into with real estate. Here are a few things to think about before you put your money down.
Property ownership tends to require a lot of cash
It doesn’t matter whether you’re buying a residential home and planning to add a basement apartment, or shopping around for a rental condo as an investment property: real estate prices across most of Canada have yet to be reeled in by recent interest-rate hikes, meaning you’re going to need a big bundle of cash just to make a down payment. For some, this is a big barrier to real estate investing.
Rental income isn’t always uninterrupted
If you’re buying a rental property, remember that you won’t always be able to count on uninterrupted income from your tenants. Sometimes, you’ll have to weather a month or two where you’re between renters, trying to find someone suitable to move in. Make sure your budget, and bank account, can handle those periods when rental income dries up without running the risk of missing a mortgage payment and denting your hard-earned credit rating.
Property ownership comes with its share of problems
If there’s one thing that’s guaranteed with every property, its things breaking or going wrong. From leaky roofs to dripping faucets, plugged sinks to problematic furnaces, there’s almost no end to the potential issues. If you’re not the handy type who’s ready, willing, and able to tackle issues as they arise, expect to pay for professionals to come in and take care of things for you.
Besides regular building maintenance and landscaping, owning a rental property can come with a whole other set of other headaches, whether it’s handling requests at odd hours, chasing down tenants who don’t pay the rent on time, covering the rising cost of insurance premiums, or paying to replace broken fixtures and appliances. You can hire a property manager to handle the problems, but it’ll cost you a healthy chunk of the profits.
Lower risk, lower reward
While it’s true that property prices have been on a steady climb for some time now, rising home values haven’t helped the real estate market outperform the stock market over the past three decades.
There tends to be less volatility in real estate, especially when it comes to residential housing, but the likelihood of massive earnings is much more limited. If you’re hoping to hit a huge investment home run, the income potential is better by investing in leading blue-chip stocks.