Is Real Estate a Good Investment?
Friday Mar 29th, 2019
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:
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.
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.
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.
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:
- Single-family: You rent out the entire house or condo to one tenant.
- 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
- 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
- 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
- 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
- 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.