- General Interest - Personal
Real Estate Investing: The Good, The Bad, and The Ugly
August 05, 2022
When you consider that multiple-property owners own nearly one in three Canadian homes, it becomes apparent that real estate investing is alive and well in Canada. The real estate investment landscape is broad and takes many forms. Some investors purchase distressed homes, fix them up, and sell them in short order for a tidy sum (known as property flipping). Others buy property with the goal of finding tenants to offset the mortgage through monthly rent payments. And with the huge growth in popularity of rental platforms like AirBnB and VRBO, still others are purchasing vacation properties intent on generating rental income through short-term stays.
So, is real estate investing a viable investment strategy worth exploring? Here we dig into some of the good, the bad, and the ugly around real estate investing.
Real Estate Investing – The Good
Real Estate Appreciates Over Time
Real estate investing is popular for one primary reason: historically, real estate tends to appreciate. While market fluctuations are par for the course, real estate can generally be counted on to increase in value as time goes on. This appreciation is due to a number of factors, including population growth, inflation, and changes in market conditions.
Real Estate Can Provide Passive Income
Finding a way to make money while you sleep is the dream for many. And real estate does have the potential to generate that much sought-after passive income. With a steady stream of tenants comes along a steady stream of rental income. This income can help to offset the costs of ownership, such as mortgage payments, property taxes, repairs, and maintenance. And in some cases, the rent might even cover the entire cost of ownership. With the right mix of properties and tenants, real estate can be a potential way to build long-term wealth.
Building Your Overall Personal Equity
Equity is the portion of your assets that you own outright, and it can be used as collateral for loans or investment opportunities. By investing in real estate, you’re further building your overall equity portfolio, by building your property equity with each mortgage payment you make. Furthermore, as the value of your property appreciates, your equity will grow even further. Equity that can then be used for additional investment opportunities.
Real Estate Investing – The Bad
Real Estate Investing is Costly
Before a real estate investor gets to that desirable passive income stage, there is a whole lot of work and upfront costs that are involved with getting into the real estate investing game. For starters, there is a down payment to contend with, realtor fees, legal costs, plus time, materials, and labour for any renovations that may be required. While it is true that real estate investing can provide a stream of passive income, there are also a number of challenges that investors need to be aware of. For example, finding tenants and managing properties can be time-consuming and difficult. It’s not hard to find those nightmare stories of brutal tenants who inflict damage on the property, damage well in excess of what their damage deposit can even begin to cover. In addition, unexpected repairs and maintenance can eat into profits (hello foundation repair and roof replacement).
Recent Legislation Designed to Curb Real Estate Investing
Come this January, new legislation is in effect designed to curb property flipping. We discuss this new legislation in greater detail here, but the gist of the new Canada Revenue Agency (CRA) rules is that any profits earned on any home or rental property that is sold within less than twelve months of being purchased will be taxed like business income. This move will most certainly cut into revenue for those in the business of property flipping.
Real Estate is not Liquid
Sure, having real estate typically increases your overall financial portfolio health. But what if something happens, one of the many unexpected curveballs that life is known for throwing, and you need money – not now, but yesterday. Accessing those real estate dollar bills is not an easy proposition. Selling off property is not a quick and easy undertaking. And the market may not be in a cooperative state for giving a good return when you need it to be cooperative the most.
Real Estate Investing – The Ugly
Not for the Risk-Adverse
Despite what has been happening in Canada’s real estate market in recent years, real estate isn't always a sure thing. There's always the chance that the market could take a sharp downturn and your property could lose value. A rule of thumb in real estate investing is that when everyone else is selling you need to be buying. And then when everyone else is buying you need to be selling. Going against the grain like this is not for the faint of heart. Pile on to this the ongoing chatter of the real estate bubble bursting, and, those who are prone to sleep loss may be best to steer clear.
At the end of the day, the best and most secure path to financial freedom is to work with your accountant and their team of professional advisors to ensure you have a prudent financial plan in place. A prudent financial plan that factors in the need for diversification in your portfolio. Diversification is so critical as it ensures that a drop in value in one area will be offset by gains in another.
Looking to take the first step in true diversification? Book your portfolio review today.
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