Real estate is its own asset class, offering different attributes from equities and fixed income. As such, it can help diversify wealth. Investing in real estate does not require specialized expertise; most Canadians understand the basics of holding property through home ownership. Many have done very well due to home price appreciation over the past two decades.
The inflation-adjusted returns for real estate over the past 50 years in Canada are very similar to that of equities. But those returns came with much less volatility than stock markets. In addition, income forms a bigger portion of its total return compared to stocks, which are more about capital gains. So real estate may be a more suitable investment for income-oriented investors such as retirees. But young investors, too, can take advantage of the leverage uniquely available to real-estate investors; banks will readily lend you up to four times your money at favourable rates to buy real estate, where they won’t do that if you are buying stocks or bonds.
“As the property appreciates, the return on initial investment for your down payment can be much higher due to the leveraged amount,” said Sabine Ghali, managing director of Buttonwood Property Management in Toronto. Of course, as many landlords are finding this year, leverage works the other way, too; when property values come down, the loan principal owed remains just as daunting.
What are the risks of investing in real estate?
Compared to other assets, real estate is illiquid. It takes time to find a suitable property to buy or a willing buyer for a property you’re selling. When you do, the costs of the transaction are high, typically upward of 5 per cent of the price for the seller. That includes agent commissions, legal fees, inspections and other third-party expenses, but not your own time.
Because investment properties start at around $100,000 in Canada, and most cost multiple times that, it’s a difficult market to wade into incrementally. Even with mortgage financing, you have to have at least a middling net worth to participate. (See a list of lower-cost alternative ways of getting real estate exposure below.)
Though less volatile than the stock market, property markets fluctuate. Should interest rates rise while you own the property, its value could decrease even as you face higher mortgage payments on renewal. Economic and employment prospects in the community matter, too, as does quality of life. There are particular risks to your property of fire, damage and natural disasters. You can get insurance for that.
What’s harder to control is the relationship with your tenants. An exacting process to screen prospective tenants, including a credit check and interviewing employers and past landlords, can go a long way toward eliminating future problems, according to Ms. Ghali. Provincial legislation lays out a process for handling disputes between tenants and landlords, though rental tenancy laws and tribunals tend to err on the side of the former. Ally Ballam, a real-estate adviser with Engel & Volkers in Vancouver, recommends owners keep three to six months’ rent in a separate account just in case there’s a dispute and you go a few months without receiving income from the property.
Finally, there is a risk of vacancy, whether resulting from tenant churn or adverse market conditions. This risk can never be eliminated entirely but can be minimized by owning higher-quality properties in favourable locations.
“Buying a property for investment purposes that can be your primary residence if the market turns really bad is always a nice insurance policy,” Ms. Ghali said.
What taxes and regulations apply to investment property?
Unlike a principal residence in Canada, investment property is subject to capital gains tax when you sell it. You must also pay income tax on the rental income while you own the property. Both will eat into your returns. However, these taxable amounts can be partially offset by expenses incurred from financing, maintaining, managing and improving the property. It’s worth consulting a tax adviser to minimize your taxes payable, at the very least when it comes time to sell.
Also make yourself aware of provincial, municipal and condo corporation regulations applicable to any property you’re considering buying. Some provinces and municipalities have controls on rent, which may constrain your ability to raise it to the market price. British Columbia and Ontario have both introduced taxes on homes purchased by foreign buyers (not Canadian citizens or permanent residents). Vancouver and Toronto both have levied property surtaxes on homes deemed to be vacant, and other cities are considering adopting similar measures as a way to increase the housing supply.
Many Canadian municipalities restrict or completely ban short-term rentals in certain housing types. Further, condo corporations may adopt restrictions, for example on short-term rentals or the proportion of units in a building that can be rented out.
Is now a good time to invest in real estate?
The good news for prospective buyers: After huge price appreciation in recent years, most Canadian markets are undergoing a turn and prices are coming down.
The bad news: The big factor pushing prices down is the increase in borrowing rates. So for most buyers, the drop in prices will be offset by higher mortgage payments.
The takeaway: This is a potentially perilous time for investors with only a 20-per-cent down payment (the minimum required by lenders on investment properties) to get into the market. If you are in that situation, you’d better be confident you are paying below market value. It may be an opportune time, however, for people who own their home outright, have some extra cash and don’t need to borrow huge sums to get into the investment property market. If financing isn’t a big worry, your dollar will go further today than it has in a while.
Keep in mind that real-estate markets are notoriously local. Different dynamics will be at play in Sudbury and suburban Montreal. Time and again, sales trends after the fact suggest there’s virtually always a type of property somewhere in Canada that is a steal right now. The challenge is finding it (or them).
How do I buy real estate?
You search for an investment property to buy the same way you might do your own home: look at listings, engage a real estate agent and/or search on commission-free sales platforms. The most comprehensive public database of Canadian homes for sale can be found at realtor.ca.
But there are other avenues to find the best deal. Ms. Ballam and sales partner Amy Leong specialize in working with developers to offer their clients pre-sale condos at prices usually reserved for insiders before they are offered to the general public.
“Make sure when you are looking to buy an investment property that you are working with an agent who specializes in investment properties,” Ms. Ballam advises. They will, for example, run pro forma cash flow projections for your rental income and expenses under different mortgage-rate scenarios so you have a better idea of what you’re getting into.
In addition to an agent, you will likely need other service providers, such as a lawyer, property inspector and mortgage broker, to get the transaction finalized.
What do I need to do after I buy an investment property?
If you have the time and inclination, you can reduce your costs and potentially increase your returns by managing the property yourself. That involves finding and dealing with tenants, collecting rent, seeing to maintenance and repairs (including after-hours emergencies), and paying property taxes as well as applicable utility and other fees. You will need property insurance; it will be somewhat higher than for an owner-occupied space. Standard lease documents can be downloaded from most provincial websites that will help reduce the risk of legal disputes, which can potentially drag out for months, interrupt your rental income and incur major costs.
Alternatively, you can hire a property-management company, which will do most or all of the tasks listed above for 8 to 10 per cent of rental income on long-term rentals and 12 to 15 per cent on short-term ones. Your real-estate agent can refer you to such a firm in your area, but like anything else, it’s worth shopping around. Some real-estate sales and finance companies have their own property-management services arms.
Like any major investment, you should have a strategy. Do you intend to flip the property in a fast-rising market? Hold it long-term? Renovate it in the hope of raising the rent? For investors committed to the asset class, Ms. Ghali recommends banking rental income with the aim of buying another property every three to five years: “This power of compounding added on top of the leverage aspect of real estate investing can create potentially huge gains over a longer period of time.”
Are there lower-cost ways to get exposure to real estate?
The millennial lament about buying a home, epitomized by the hashtag #donthaveamillion, is also a big hurdle for would-be investors. Fortunately there are a number of ways for investors of modest means to gain exposure to real estate without buying a second home or the hassle of managing the property.
Real-estate investment trusts are securities that trade on stock markets. They are designed to hold and manage a basket of properties and pass on income through distributions (similar to corporate dividends) to investors. With REIT units or an exchange-traded fund (ETF) invested in them, you can benefit from both land value and rent increases in the real-estate market for as little as $100. Being traded on stock markets, they still tend to be highly correlated to equities.
For the last decade or so, financial technology startups have been trying to come up with ways for small investors to buy crowdfunded properties fractionally for as little as a few thousand dollars per investor. Canadian examples include Addy Technology Corp., BuyProperly, NexusCrowd and Willow Real Estate Technologies. On the plus side, these platforms promise to be true diversifiers, where your investment’s value is tied to real assets. Still, they have a short track record and are competing with well capitalized landholding companies owned by pension funds, REITs, private-pooled funds and wealthy families and individuals.
Real-estate pooled funds
For a minimum investment as high as $100,000 and a lock-in period, private real-estate investment funds allow investors to participate in owning (and sometimes developing) rental properties around North America. Stick to general partners with a history and good reputation; there are some shady operators in this niche. Beware promotions promising suspiciously high or “guaranteed” returns and always demand to see financial statements before putting your money down.
Investing in your own home
Homeowners in Canada’s pricey, big-city markets already know about “mortgage helpers” such as basement suites. Adding or improving a rental suite in your own home or building a laneway home represents a way to leverage your existing primary residence to provide additional income and increase the equity in your property. It’s essentially an investment property tacked onto your home.
As such, be mindful of costs that can erode your rate of return. Though small, new laneway homes still require the most expensive components of any house, namely kitchens, bathrooms and HVAC systems. But it should still be cheaper than buying a separate property.
No room for a separate suite? Now that COVID-related travel restrictions have been lifted, foreign students are coming back to Canada. You can generate income by renting out a spare room. There are various agencies that match students to host households under a variety of terms.
Imperial Oil to invest $720M in renewable diesel plant near Edmonton – Yahoo Canada Finance
The Calgary-based company has touted the project as the largest of its kind in Canada, aiming to produce more than one billion litres per year, or 20,000 barrels per day, of renewable diesel. Imperial says the fuel has the potential to eliminate about three million tonnes of emissions per year, compared to conventional fuels.
Imperial projects renewable diesel production will begin in 2025. The company says hydrogen and biofeedstock will be combined with a proprietary catalyst to produce premium lower-carbon diesel fuel. The project was first announced in August 2021.
Last year, Imperial said a final investment decision for the renewable diesel facility was expected in the coming months, based on factors including government support and approvals, market conditions and economic competitiveness. The company said on Thursday that regulators are expected to approve the project “in the near term.”
“Imperial supports Canada’s vision for a lower-emission future, and we are making strategic investments to reduce greenhouse gas emissions from our own operations and to help customers in vital sectors of the economy reduce their emissions,” CEO and president Brad Corson said in a news release on Thursday.
In September, Imperial announced a long-term contract with Air Products and Chemicals (APD ) to supply low-carbon hydrogen for the proposed renewable diesel complex. The company says it is looking for third parties for bio-feedstock supply needed to produce renewable diesel fuel.
Imperial says a significant portion of the renewable diesel from Strathcona will be supplied to British Columbia in support of the province’s plan to lower carbon emissions.
Imperial has laid out goals to reduce its greenhouse gas intensity by 30 per cent by 2030 and reach net-zero in the company’s oilsands operations by 2050. The company says it plans to use renewable diesel in its operations to reduce emissions.
Imperial will report fourth-quarter 2022 financial results on Jan. 31.
Toronto-listed shares added 1.75 per cent to $71.00 as at 11:07 a.m. ET Thursday. The stock has added about 38 per cent over the last 12 months.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
Imperial Oil to invest $720-million to construct renewable diesel facility in Canada – The Globe and Mail
Imperial Oil Ltd. IMO-T says it is going ahead with a $720-million project to build a renewable diesel facility at its Strathcona refinery near Edmonton.
The project, first announced in August 2021, is expected to produce 20,000 barrels per day of renewable diesel once it is complete.
The company says a significant portion of the production will be sent to British Columbia to support the province’s plan to lower carbon emissions.
Imperial says it also plans to use renewable diesel in operations as part of its emission reduction plans.
Renewable diesel production is expected to start in 2025.
Imperial says the project is expected to create about 600 direct construction jobs.
Is Tesla (TSLA) Still a Worthy Investment?
Distillate Capital, an investment management firm, released its fourth quarter 2022 investor letter, a copy of the same can be downloaded here. At the end of the fourth quarter, Distillate’s U.S. FSV strategy declined 10.58% on a total return basis net of fees compared to a decline of 18.11% for the S&P 500 benchmark. Better relative performance for Distillate’s SMID QV strategy continued into 2022 with a decline of 8.64% on a total return net-of-fee basis, significantly ahead of a comparable decline of 20.49% for the Russell 2000 ETF and -14.67% for the Russell 2000 Value ETF. On the other hand, Distillate’s Intl. FSV strategy again lagged its MSCI ACWI Ex-US benchmark in 2022, while the Distillate’s U.S. FSV strategy’s free cash flow to market cap yield valuation of 7.2% compares very favorably to 5.1% for the same measure for the S&P 500. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2022.
In its Q3 2022 investor letter, Distillate Capital mentioned Tesla, Inc. (NASDAQ:TSLA) and explained its insights for the company. Founded in 2003, Tesla, Inc. (NASDAQ:TSLA) is an Austin, Texas-based multinational automotive and clean energy company with a $454.3 billion market capitalization. Tesla, Inc. (NASDAQ:TSLA) delivered a 16.81% return since the beginning of the year, while its 12-month returns are down by -53.00%. The stock closed at $143.89 per share on January 24, 2023.
Here is what Distillate Capital has to say about Tesla, Inc. (NASDAQ:TSLA) in its Q3 2022 investor letter:
“The fund’s relative outperformance occurred despite a nearly 2.5% headwind from being underweight the energy and utilities sectors where cash flow instability and leverage tend to limit our holdings domestically. By individual stock, the largest contributors to relative outperformance were unowned positions in Amazon and Tesla, Inc. (NASDAQ:TSLA) which declined around 50% and 65% during the year, respectively.”
Our calculations show that Tesla, Inc. (NASDAQ:TSLA) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Tesla, Inc. (NASDAQ:TSLA) was in 88 hedge fund portfolios at the end of the second quarter of 2022, compared to 73 funds in the previous quarter. Tesla, Inc. (NASDAQ:TSLA) delivered a -35.31% return in the past 3 months.
In January 2023, we also shared another hedge fund’s views on Tesla, Inc. (NASDAQ:TSLA) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters Q4 2022 page.
Disclosure: None. This article is originally published at Insider Monkey.
OnePlus Teases Its First Tablet Ahead of Launch Event – CNET
B.C. to install earthquake warning sensors to give life-saving notice
To save Egypt's economy, get the army out of it – The Economist
Silver investment demand jumped 12% in 2019
Iran anticipates renewed protests amid social media shutdown
Search for life on Mars accelerates as new bodies of water found below planet’s surface
Health21 hours ago
COVID boosters effective against XBB variants: U.S. CDC study
News13 hours ago
How Racism Can be Prevented in Canada
Sports21 hours ago
How a pair of ex-Blue Jays got into the Hall of Fame with questionable cases
Media20 hours ago
Stopping social media from harming our kids
Health19 hours ago
Bristol study finds Covid booster gives tenfold increase in antibodies
News22 hours ago
Toronto mayor calls for national summit to tackle mental health crisis
Economy20 hours ago
2 in 3 Canadians say the economy is doing poorly: poll
News20 hours ago
Canada considering sending 4 Leopard tanks to Ukraine: sources