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Should you invest in residential real estate? Consider these 3 issues first

With interest rates rising and real estate prices falling across Canada, is it a good time to invest in residential real estate? As with any investment, due diligence is a must. We've summarized three of the most common inquiries we receive.

As Manager of Family Office Services (FOS), Jason oversees the advanced planning needs of high-net-worth clients and their families across Canada. 
“The best investment on earth is earth.”
Louis Glickman, New York based real estate investor and philanthropist

With interest rates rising and real estate prices falling across Canada, many clients are asking whether now is the right time to buy real estate as an investment. Real estate prices have been at an all-time high in many major Canadian cities, so double-digit decreases in real estate prices may be an opportune time to enter this market to diversify your net worth.

Real estate investments come in many forms and are typically categorized as direct, indirect, residential, commercial, or industrial. Since residential real estate is the most accessible, we’ll focus on important considerations that a novice real estate investor should be mindful of in that category.

As with all investment opportunities, due diligence is important. To help you determine whether this option is right for you, we’ve summarized three of the most common inquiries we receive. They cover issues that can help you review and select the right investment property for you.

What type of residential property should I invest in?

Two good options for residential real estate investing entail using your primary residence or purchasing a standalone property. Let’s look at each.

Your own principal residence
What real estate property do you know better than you own home? If you’re interested in real estate investing and want to learn how it works without a large financial commitment, consider using your own home as a starter investment. If you’re not comfortable with tenants in your own home and plan to sell in a few years, why not make some high-value upgrades that will be attractive to future purchasers (e.g., remodelling your kitchen and bathrooms)? Consult with your real estate agent and/or an interior designer to understand what purchasers are looking for, so you can enjoy these upgrades now and realize a return when you sell.

If you plan to stay in your home and are comfortable with tenants to realize a return, consider building a secondary rental suite in your basement or a laneway rental apartment on your property. Due to tightening rental markets, several Canadian municipalities are changing their laws to make these types of rental properties more available (see resources at the end of this piece to learn more1). These types of investments will likely cost less than investing in a stand-alone investment property, and will allow you to oversee operations since the tenants are in “your own backyard”.

Standalone residential property
If you have the capital and prefer that your tenants reside farther afield, a standalone residential property may be a better option. These types of properties can range from a 1-bedroom condo located near a downtown university to a single-family home in the suburbs. It could also be a vacation property popular with skiers in the mountains or boaters in cottage country. Since standalone properties may be located some distance from your home, you’ll have to decide if you can manage them on your own or prefer to benefit from the services of a property manager (more on this below).

Where should I buy?

Whether you intend to go the principal residence route or purchase a standalone property, one of the first questions you should ask yourself is, “Who is my ideal tenant?” As the primary revenue driver for your investment, you should be clear on what type of tenant you want. Minimize the risk of not being paid and manage ongoing maintenance and tenant search costs by deciding which type of tenant will ideally occupy your investment property. This will go a long way in maximizing your eventual return.

Your ideal tenant will direct your rental property search and purchase. If you decide that post-graduate students focused on their studies are ideal, then 1-2 bedroom units located close to a university is probably the way to go. If retirees looking to live in the downtown core close to entertainment, dining and health care are your focus, then properties catering to this demographic will be more attractive to you.

Deciding on your ideal tenant will influence how you advertise your investment property, and the types of amenities you may look for when purchasing a property. It will also inform your decisions about any upgrades you choose to make (e.g., adding a hot tub for a ski vacation property).

Who will manage my real estate investment property?

This is one of the most common questions from our clients. Their first inclination is to take on this role to save the costs of hiring a property manager, but you need to decide if this makes sense for you. Finding and screening tenants, dealing with missed rental payments, answering client calls at all hours and negotiating with contractors are just some of the responsibilities of a property manager.

If you’re a do-it-yourselfer and have the time and stamina, acting as your own property manager can be an option. However, property managers have industry experience, contacts, and technologies to make their operations more efficient than most people can do on their own. The property management industry is also very competitive which tends to keep pricing low. Ask yourself, do you want to deal with a tenant’s leaky toilet in Toronto while you’re in Florida for the winter, or would you rather have your local property manager with a roster of qualified plumbers deal with it?

Real estate investments can provide an ongoing positive cash flow, tax benefits, and long-term capital appreciation. So current market conditions may present unique buying opportunities for those with the funds available to diversify their family’s net worth. Like your public market investments though, some due diligence will go a long way to reduce the potential risks while maximizing your long-term reward. To understand these risks and the potential tax implications of real estate investing, including maintaining your principal residence exemption, speak with your Financial Advisor.

1 Resources for learning more about secondary rental suites and laneway rental homes across Canada:

 

This document is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon as advice. Please contact your lawyer, accountant or other advisor for relevant advice. CWB Group takes reasonable steps to provide up-to-date, accurate and reliable information but is not responsible for any errors or omissions contained herein. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by CWB Group or any other person as to its accuracy, completeness or correctness. CWB Group reserves the right at any time and without notice to change, amend or cease publication of the information. The views expressed herein are those of the author and do not necessarily represent those of Canadian Western Bank or its affiliates.

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