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money

That is a question that real estate agents get
asked a lot. In general, real estate tends to be a good investment as, in most
cases, real estate appreciates in value over time. However, how much you pay
for the property, how much it increases in value, and how long that takes
varies greatly.

Here’s the breakdown on investing in real estate
to help you decide if it’s right for you.

What is
the Average Rate of Return on Real Estate Investments? 

We expect to see modest house price increases in 2019, at 1.7%. We
have just come out of some wildly high housing prices, especially in Toronto
and Vancouver areas. However, although prices have stabilized, investment in
properties outside some of the major cities can see some excellent gains.

In 2018, some good examples of growth include
13% in Chilliwack and Windsor, 17% in London, and 11% in Charlottetown. Combine
this with general rising rent costs across Canada, which are
predicted to rise by as much as 6% in 2019, and that could translate
into a great investment opportunity.

Is Real
Estate a Safe Investment?

As long as you are buying property at the right
price in an area where the value is sure to rise, real estate is safe and
lucrative. If you aren’t smart about your budget and location, you could end up
like many Toronto property owners who purchased at unrealistically high prices
in 2017. Those homeowners will have to pay down their mortgages for a while
before they can make a profit, especially if they made lower down payments.

There tends to be less volatility in real estate
when compared to something like stocks and bonds. With real estate, you can
minimize risk by holding on to your property longer should there be a drop from
the price you paid. That way, you can continue to build equity. As well, with
real estate, as you pay down your mortgage, you also see your equity grow.
Later on, your property will be easier to leverage as capital as it is a
“tangible” asset.

Real estate is a safe investment because:

  • It has a high tangible asset value
  • It will almost always increase in
    value over time
  • It provides diversity to your
    portfolio to help reduce risk
  • It comes with tax benefits

How Do I
Start Investing in Property?

Property investment takes planning. Here are
some steps to help you get started:

Clear Debt

Start paying down your debt as soon as possible
to establish a strong credit rating. This step is also important as the less
debt you carry, the more real estate you can buy.

Start
Saving

As your debt is paid down, start putting money
aside for the down payment on your first property. Make this a habit and the
next thing you know you‘ll have enough money to purchase your first home.

Research

Start researching as much as you can about real
estate. Important things to study include real estate investment, market
trends, and up-and-coming neighbourhoods.

Find a
Trusted Agent

Work with a trusted agent to find the best
properties with the best potential for growth.

Find Your
First Purchase

If you don’t already own your own home, once
you’ve saved enough for your down payment, look for your own home. Choose a
small, affordable home in an up-and-coming neighbourhood to help ensure you can
sell it for more. It is best to put down at least 20% and find the best
possible terms for your mortgage. It’s a good idea to only purchase a home with
mortgage payments less than your current rent.

Save Again

Continue to save so that you can look for your
next property. This property will be rented, so make sure you are buying in an
area that will provide you with enough rent to cover your full mortgage
payments. That has to include all applicable taxes and home insurance. Don’t
overlook fixer-uppers that you can upgrade with minimal investment to get more
rent. Ideally, you will not just breakeven but also accumulate a few hundred
dollars per month to put towards your next purchase. This money will also come
in handy to cover maintenance costs.

Pay Down
Your Mortgages

Your goal should always be to pay down your
mortgages as soon as possible. If you pay off your mortgage or see a potential
gain in selling your home, that is how you can begin to grow your real estate
portfolio. Also, when you pay down your rental properties quickly, the rent becomes
straight income and can be put toward your next investment.

Are Houses
a Good Investment?

For the rookie real estate investor, purchasing houses as
rental property can provide an additional income while offering an investment
that will appreciate in value. You can look at two types of rental
opportunities:

  1. Single-family: You rent out the entire house or condo to one
    tenant.
  2. Multi-family:
    You rent separate units on each floor.

Many factors will affect how much you can make from each
type of rental investment. Here is a comparison between the two:

Single
Family Homes

Advantages

  • Typically appreciate faster
  • Easier to sell making them more
    liquid
  • Just one tenant to find and deal
    with
  • No need to worry about complaints
    and issues amongst tenants
  • Easier to collect bills and set up
    utility payments
  • Easier to finance

Disadvantages

  • Less cash flow generated in most
    cases than a multi-family home
  • Can be “riskier” if you end up with
    a bad tenant who does not pay rent or skips out
  • Harder to find a good tenant as you
    have to charge quite a bit for rent
  • No economies of scale if you want to
    hire a property manager

Multi-Family
Homes

Advantages

  • Better cash flow with more
    units
  • Lower unit price makes it easier to
    find tenants
  • If one tenant is a dud or moves, you
    still have the cash flow to help cover your expenses
  • Economies of scale
  • Less expensive to manage on a
    per-unit basis

Disadvantages

  • Higher maintenance costs due to more
    people, more appliances to repair, more tenant turn over, and so on
  • Takes more of your time as there are
    more tenants to worry about, collect rent from, and to complain
  • Slower appreciation in value
  • Fewer buyers when you want to sell
  • Potential tenant complaints about
    things such as noise, messiness, smells, and more
  • Harder to find financing

Real estate investors can
grow their net worth by amassing more and more properties. It is a good
investment in the long term due to appreciation. As you pay down your mortgage,
your equity builds. The housing market is not too volatile, making real estate
a safer investment than many other options.

Dean Manton

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