Down-payment cash doesn’t go nearly as far as it used to.
Canada’s housing frenzy has made property owners a lot of money. But it’s also made the cost of market entry much higher for first-time real estate investors.
Ten years ago, a $100,000 investment would have been enough for down payments on two downtown Montreal condos. Five years ago, it would have been more than enough to put down on a single-family investment property in Hamilton or Ottawa.
But with historically low mortgage rates causing price explosions in virtually every Canadian city, $100,000 doesn’t get you as much house as it used to — in part because investors are required to put at least 20 per cent down on an investment property.
So what can investors do with $100,000 at their disposal? Here are four suggestions.
1. Buy property in a smaller market
Having only $100,000 won’t get you far in Canada’s most in-demand rental markets. With the average condo in the greater Toronto area selling for just over $688,000 in August, according to Toronto Regional Real Estate Board data, a 20 per cent down payment exceeds $137,000.
But property ownership is still the chosen way to invest in real estate, says Brett Turner, Calgary-based investor and owner of Redline Real Estate Group.
“If you’re buying an income property, you’re going to get an opportunity to take advantage of four ways to make money with your investment,” he says.
Those include passive appreciation, increased equity through renovations, mortgage paydowns that increase your net worth and positive cash flow.
You don’t need to own property in a 24-hour city to generate solid returns. It’s all about balancing the cost of your property with the rent it generates, its realistic potential to command higher rents in the future and the costs associated with having it managed for you by a local expert.
A $100,000 down payment should be enough to get you into an income-generating property in Calgary, Saskatoon, Regina, Winnipeg, Fredericton or Charlottetown. And there are plenty of other affordable cities in Canada that are bursting with students, and health-care and government workers who aren’t yet ready to buy their own homes.
Turner’s advice: Try to buy at a price below the local average and keep your first go-round as a landlord simple.
“You don’t want to purchase a property that is going to require you as an investor to solve a lot of problems,” he says. “The newer a property you can buy, where you shouldn’t have to steer a large renovation — that kind of thing is a great approach.”
2. Load up on REITs
Maybe you want to profit off both the long- and short-term potential of real estate but don’t want the hassle of being a landlord. You can channel some, or all, of your $100,000 into real estate investment trusts (REITs) instead.
“I think they’re very useful for income-oriented investors, especially in this environment, where interest rates are low and dividend rates are stable,” says Ethan Astaneh, financial advisor at Nicola Wealth in Vancouver.
Canada’s shortage of properties to buy will continue to put pressure on the residential rental market — and rents themselves — which is music to the REIT investor’s ear.
But a diversified REIT play will also require you to get some exposure to non-residential asset classes like industrial and office properties. Dabbling in these areas can be daunting for new REIT investors.
“Individuals who have professional advice will be getting recommendations,” Astaneh says. “Individuals who don’t will have to piece it together themselves.”
When choosing a REIT, he says it’s critical to understand each asset class’s current place in the market and investigate which REITs have performed well over the long term. Plus, you need to investigate the leadership team.
“So much of a REIT’s productivity actually relies on the skill of the management team,” says Astaneh. “That’s really what you’re buying.”
3. Take a dip in a private pool
Similar to REITs are offerings called “private pools.” They let investors put their funds together as part of a limited partnership that owns property directly.
As an investor, you and the other owners are in charge of the property, but management responsibilities are farmed out.
As with REITs, Astaneh says, the liquidity level of a private pool is higher than with owning actual property; although he adds some pools require six-months’ notice if an investor decides to pull out.
But, whereas REIT shares can be purchased for a few hundred dollars, the cost to access a private pool can be steep. Your $100,000 may not be enough.
4. Put on your private lender hat
Another way to generate solid returns with $100,000 is by lending it to other real estate investors.
There’s no shortage of house flippers needing funds for six-month reno projects, homeowners looking to secure second or third mortgages or novice developers assembling capital for larger-scale land deals.
Putting these loans together will require help. Mark Yamada, president and CEO of PUR Investing in Toronto, says a good real estate lawyer is a must, not only for protecting you as a lender but because they can expose you to a large network of clients who could become future borrowers.
A mortgage broker who specializes in private money and has experience with these loans can also be an invaluable information source, although you might have to cut them in on the returns.
“You can charge double-digit, short-term loan rates,” Yamada says. “If somebody had $100,000 and wanted to get participation in the market, that’s certainly one way to do it.”
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities commissions. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances.