Make Your Own Rules When Investing in Real Estate
The stock markets tend to rise and fall, but one investment that moves higher and higher over time is real estate, in the form of buildings and land. While every portfolio should be diverse, adding land development, commercial buildings, single-family and multi-family residential buildings is another great way to build your holdings and returns as time goes by. In an era when pension plans are as rare as the mastodon, they are a great way to erect your own pension plan.
Many Canadians have already taken an interest in real estate investments, of course. A lot of people are moving beyond just owning their residence and even a vacation home, entering the property game, whether they are Canadians or foreign investors. After seeing the stock market fall through the floor in 2008 and 2009, they see real estate values as more reliable. Even though real estate prices fell to some degree then too, you can lose 100% of your holdings when a company’s stock falls apart, but you still have residual value in real estate that you can access if you need to.
There are other ways for Canadians to invest in real estate, of course. There are real estate investment trusts (REITs), mortgage investment corporations (MICs) and other types of equities focused on real estate, as well as crowdsourcing opportunities to enter the market.
TD Bank conducted in a survey In 2014 that found that about 40% of investors viewed real estate as an investment that always provides financial benefit. That same survey showed that about three-fourths of respondents thought that their home was an investment, and a third of the respondents had bought other properties as real estate investments. About a quarter had invested in REITs, and about 1 in 12 had invested in securities backed by mortgages. The respondents thought that real estate was the second-most reliable investment sector, behind the financial sector. The baby boomer generation was the most optimistic about real estate, which is not surprising given that primary residents have risen in value by an average of a whopping 52.2% between 2005 and 2012 – which includes the big drop in 2008 and 2009.
Not all real estate investments are the same, of course. In 2013, the REIT suffered mightily, and industrial and commercial properties are becoming hard to find in several areas in Canada.
Even so, experts are still pointing to real estate (in addition to a primary residence) as a terrific investment value. After all, a lot of people have emotional ties to their own homes and do not view them as clinically as they do, say, a balance in a mutual fund.
One key error, though, is viewing industrial and commercial real estate as behaving the same way as the residential market. One of the most profitable options is the multi-family building. Tenants move in and make regular payments which go up over time. Obviously, you need to set aside savings for repairs and management expenses, but so long as the building remains an attractive place for people to live, those checks will come in every month.
Commercial buildings can be even less hassle, because frequently they just have one tenant – which means just one party to keep happy. Of course, if the tenant moves out, your rent goes from 100% to 0%, whereas in a four-family building, if a tenant moves out, your rent income just drops by 25%. However, commercial tenants are also likely to stay longer once they are in the building.
Investing in industrial or commercial real estate often requires a bigger sack of money up front, often in the seven figures, so many investors will go in with other investors, either in a limited partnership or a joint venture. This also reduces your own risk and can lead to more opportunities. You do lose some liquidity in this arrangement if you want to sell out but the rest of the group wants to stick with things. Right now, supply is way down in the commercial and industrial sectors as well. A lot of the people who own those properties enjoy the rents and the appreciation in value – and they don’t have any interest in selling, which can keep the market on ice.
So if you are interested in entering the commercial or industrial real estate market, it can be good to enlist a realtor to pound the pavement for you and talk to people who are willing to sell their property before they put it on the market. Once a property in a good location goes on the market, there will instantly be as many as 20 other bids.
Private investors have been a part of as many as half of all commercial real estate deals in Canada since 2007. This includes investment families who are picking up properties to add to their estates as well as investors buying in groups. These private investors do not, by and large, have a board to report to, so they can adopt a little more risk.
If you don’t want to deal with tenants, and you don’t have enough cash on hand to buy a property or a part of one, you can still enter an REIT. Between 1999 and 2014, REITs delivered an annual rate of compound annual return of 13%. This beats the S&P TSX Composite Index by 600 basis points. What does this mean? If you’d sunk $1 million in the S&P/TSX Composite in 1999, by 2014 it would have been worth $2.75 million. That’s not bad, but in REITs, it would be worth $6.3 million. This includes the awful performance in 2013, when the 10-year bond yield shot up in Canada. That yield has gone back down, so REITs are back up and running. Lower interest rates have increased property values, which drives up REIT values as well.
REITs come with professional management groups and undergo scrutiny from analysts and investors. If you had invested in apartment REITs, you would have done better than if you had bought condos and rented them out to tenants – and you wouldn’t have to deal with the tenant issues.
The REIT is still very new to Canada, having just been around since 1994. When interest rates start to rise again, it will be interesting to see if REIT values come back down – which means that since rates are rock-bottom, you definitely need to consider holding the properties you have and adding REITs, instead of liquidating your properties to sink it all into REITs.
Another alternative to acquiring properties is the MIC. These companies provide short-term lending for residential and commercial properties, and they return the income as dividends. You have the possibility of a steady cash flow from both REITs and MICs. MICs only run about three years and can adjust their lending rates.
There is also the possibility of private mortgage investing. If you don’t want to get into a public market but don’t have enough cash to purchase your own land or building, there are many different private funds in which you can invest. Whether you take your money to an equity firm or deal with a crowdfunding site, there are plenty of ways to enter the real estate market.
Amansad Financial is a broker that offers mortgages to our clients. However, because of the various degrees of risk involved, we make the following commitments:
- Our mortgages are not pooled
- Our mortgages offer greater liquidity than pooled investments
- You invest in a property, not a company (so you have equity)
- There are no mandatory management expense costs because we only market self-administered mortgages. We refer clients who want third party management to Olympia Trust.