Real estate is an incredible source of income with investors participating either in a passive manner or an active manager. Regardless of the current market conditions, real estate remains unfazed and still proves to be the most valuable form of investment over the long-term.
Although real estate is an excellent financial move, it also comes with a significant cost. When you decide to be a landlord, it demands time, effort, and money before you can enjoy a steady stream of cash flow. However, there are numerous ways to invest in real estate without the obligation of becoming a landlord.
When you decide to invest in real estate without your hands-on management, it’s critical to perform your due diligence to understand which form of investment is best suited for your situation. There are REITs, mortgage investment funds, joint ventures, real estate crowdfunding, and private mortgages to name a few passive investments.
Regardless of the real estate investment you may choose to dive into, the location and the type of property, as well as management of the management, should still be your main focus. If we are to consider recent market conditions, most Canadians are now leaving larger city centres including Vancouver and Toronto and are settling down in the suburbs in search of affordability.
Ways to invest in real estate with being a landlord
When interest rates and bank rules increase, it only means more business for private lenders. Private mortgages offer more flexible rules, interest-only loans, short-term loans, among other flexibilities not common to the loans offered by traditional lenders.
In cities like Vancouver where the housing prices continue to climb and push average-income residents outside the rigid mortgage parameters, private mortgages become a viable alternative. Increasing rates add more burden to first-time homebuyers. Indeed, this is already the third time the Bank of Canada raised interest rates with the other two occurring in January and July of 2018. This presents a great opportunity for investors seeking to be involved in real estate without being an active manager.
Mortgage investment funds
While private mortgages present you the advantage of investing in a property, mortgage investment funds will provide you with an opportunity to participate in a pool of mortgage investments across multiple real estate asset types and offer a great way to evenly spread risk.
By investing in mortgage funds, you will have the opportunity to gain substantial exposure in the majority of the fund’s assets. As an investor, you have to be prudent when it comes to investing in mortgages. You may want to consider talking to an expert for financial advice before diving into any fund.
Real estate investment trusts, or REITs, provide another channel whereby investors can participate in real estate without becoming a landlord. REITs are companies that acquire and finance income-producing properties. Similar to stocks, shares of REITs are liquid assets that you can quickly sell. These properties are typically spread out across various assets such as residential, commercial, and industrial sectors in different locations.
The industrial sector, in particular, is showing impressive growth for the second quarter of 2018 and has been strengthened further by the recent U.S–Mexico–Canada (USMCA) agreement. Finding REITs that have a remarkable foundation, lesser debts, and well-performing is quite challenging, so investors need to conduct extensive research in finding the best option.
Real estate crowdfunding
Similar to REITs, crowdfunding real estate requires less operating costs but demands a long-term engagement. Although the assets are illiquid, there are higher returns as you are investing directly in the real estate project through means of P2P real estate platforms.
Most investors say that real estate crowdfunding is a game-changer, but it still requires extensive due diligence and the projects tend to carry a higher level of risk and are not vetted by industry professionals. Some of the more popular platforms include: Roofstock, CrowdStreet, and Fundrise.
If you are planning to expand your network, develop new products, or itching to move into new markets, you can consider getting into Joint Ventures (JV). Joint ventures create a unique opportunity by building partnerships with one or more individuals or businesses with core values aligned to yours.
Consider for instance someone who has the time to dedicate to finding and managing real estate deals, but doesn’t have the funds. You have the funds, so you partner with them, and they do all the legwork, and you’re simply a money partner.
Getting into JVs requires a lot of research and planning including the preparation of your exit right from the beginning.
Always consider location
Prudent market research and analysis is required before diving into any particular location. The media oftentimes may lay claim to predicting certain cities trends in terms of their rise or fall but be wary of their opinions as their insights are not necessarily backed by data.
They may support cities like Ottawa and Montreal as the hottest cities for real estate investment, but it’s up to you fact check and dig deeper to see which areas of those cities actually offer the optimal returns. Also, certain sub-markets and neighbourhoods may be good investments whereas the city overall may not be.
Macro trends also play a critical role in impacting the investment viability of a particular region. For instance, Kelowna and Edmonton are ranked as the top places for investment in commercial real estate and have notable economic growth.
The rising demands of retail, technology, and even the most recent cannabis market are the main reasons for tremendous opportunities in these critical areas. However, as macro trends shift, so do investment dollars and the resulting real estate prices.
There are plenty of investment opportunities in real estate which do not require an investor to shovel the driveway or unclog a toilet. It all depends on your investment strategy and how much of an active role you wish to play in the investment.
Among the different real estate investment options, mortgages seem to have higher potential returns, but it entirely depends on your strategy. But always discuss with an expert on where to begin diversifying your holdings.