Should You Invest in Real Estate?
Does the thought of investing in real estate appeal to you? Well, now could be the perfect time to take the leap into the rental investment arena. The continued strength of the nation’s real estate market, along with the expectation that interest rates will remain low, should provide plenty of appeal for investors looking to ramp up their real estate portfolio.
According to a recent report released by Bank of Montreal Economics, there are a plenty of advantages to investing in commercial Canadian properties. Earl Sweet, senior economist and managing director at BMO Capital Markets has stated that “After a severe and protracted market downturn in the 1990s, the commercial real estate industry in Canada has been characterized by cautious development and prudent lending practices.” This calculated approach has enabled the sector to reamin extremely attractive to investors.
Should I Invest?
In order to answer this question, you must first be honest with yourself about just how long you’re willing to ride the real estate roller coaster. Consider the Toronto real estate market. According to the Toronto Real Estate Board, the residential market in T.O. has seen the average home sale price increased from $214,971 to $465,412 in the past two decades. That’s a return of over 115 percent over 20 years, for a compound annual return of close to 3.94 percent.
And that’s before you consider any rental profits.
The moral of this story? Investing in real estate is worth it, but only if you’re in it for the long haul and only if your financial position enables you to comfortably do so. First-time investors tend to get skittish, taking out massive amounts of leverage the minute they see a year-over-year price increase. This often results in green investors buying more than they can handle, which often leads to poor upkeep and diligence. This ultimately leads to panic selling in order to raise funds to tackle debt, ultimately resulting in a net loss.
Be a Smart Investor
If you’re thinking about investing in real estate, be smart – take your time. Seek out desirable properties in up and coming areas. When it comes time to interview tenants, pay attention. Do your potential tenants have the ability to pay rent? Do they have a good tenant track record? Do you have the time and resources to manage the properly? Smart investors know when they’re about to bite off more than they can chew. What’s more, they also understand that sometimes the market slows and the rental may need to sit empty. Plan ahead for these down periods in order to protect your investment and avoid over-extending your finances.
What About Property Flips?
Not ever investment property purchase is made with a long-term investment in mind. The practice of “flipping” houses is a common one, however it can also be a dangerous undertaking for novice investors. Smart investors never purchase a property that they’re not able to hold onto over a long period of time. Consider this when crunching your numbers. If the price momentum starts to slack in the short term, can you manage to hold onto the property until the market rebounds?
Direct investment in real estate requires time, patience, experience and commitment. If you’re considering investing in Canadian property, talk to a mortgage broker first. A professional broker can help you better understand the financial ramifications of a real estate investment and prepare you for the ups and downs of property management.