What financial advisors are telling clients who want investment properties – The London Free Press

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After a year-plus of housing insanity, buying an investment property in many parts of Canada is a much more complicated calculation — even if you have the minimum 20 per cent down payment in hand.

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Home prices have risen far faster than rent values in many regions, making it harder to find properties that can attract renters and produce positive cash flow — both in city centres and in exurban locations where many Canadians have chosen to ride out the pandemic. Whether properties outside cities will hold their value once people go back to working downtown also remains in question.

And that’s only part of the equation. Experts say a pricey property purchase, which could grow more expensive as interest rates rise, must fit into your long-term financial plan.

Much in the same way a sudden windfall can trigger unforeseen headaches, a poorly considered investment property purchase can wreak havoc with your long-term financial stability.

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Here’s what three financial experts say they’d tell a moderately high-income individual who’s looking to increase her exposure to real estate by purchasing an investment property.

Carl Spiess, retired wealth manager, Toronto

“In general, it makes sense to at least balance the amount in your stock portfolio with your real estate holdings as part of your overall financial plan.

“I recall a conversation with a client in a group plan about 15 years ago. She was requesting a withdrawal of her full $50,000 from her RRSP to buy an investment property. Based on her other income, that would net only around $30,000 after tax. It also was the only stock market investment she had.

“As we chatted, [I found] out she was also becoming a real estate agent. So, between her home, her new career and her investment holdings, she was three times exposed to residential real estate and would now hold no other kinds of investments. I’m guessing — and hoping — it turned out OK for her, as real estate has done well. So has the stock market, so it might be a wash.

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“But that was a moment where I really tried to help diversify a client’s overall financial holdings and didn’t succeed. Some would say put all your eggs in one basket and watch it carefully. I still like having a blend of investment types.”

Betty-Anne Howard, Assante Wealth Management, Kingston, Ont.

“It’s important to think through what purpose the rental property will serve as part of your overall plan. Is it your intention to use the rent for income later, during retirement? Or are you buying this rental property for capital appreciation and intend to sell it when you retire?

“I encourage my clients to take a close look at the income tax implications of purchasing a rental property and decide how they want to structure the expenses if their goal is to minimize taxes. This strategy needs to be offset by the income tax considerations when you want to sell or use the rental income to supplement your retirement income.”

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Jason Pereira, Woodgate Financial, Toronto

“Real estate for investment purposes needs to be examined as such.

“I have, on countless occasions, run through the math with clients. The reality of life in the Greater Toronto Area is that market prices have driven investment property to ultra-low yields, and in many cases negative cash flow yields. That leaves only capital appreciation as a means of delivering any reasonable rate of return to the investor.

“The run-up of the last 15 years was unprecedented. Prior to that, the historical rate of appreciation was close to, or just above, the rate of inflation. The reality is, when yields are low-to-negative, one is simply making a highly leveraged bet on the pricing trend continuing. Given the fact that we are already facing an affordability crisis in Canada, there are a lot of headwinds when it comes to making that bet.

“Real estate can be a very emotional purchase — there is an obscene amount of fear of missing out in the market — but in the end, the numbers speak for themselves. Every investor should be asking themselves if they would make a highly leveraged bet, with little to negative yields, in any other investment. Odds are they would likely walk away.”

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.