Real estate is how many of the world’s richest people became wealthy. It’s also likely how their children and their children’s children got rich. In fact, huge empires have been built from a single property purchase. American author Mark Twain once said “Buy land. They’re not making it anymore.” By that logic, real estate will always be in high demand. Building generational wealth by buying real estate is not a new strategy, nor is it reserved for the rich.
Risks and rewards of real estate investing
Like all investments, real estate comes with some risks.
Unlike other types of investments which require 100 percent of the capital up-front, many real estate investors take out a mortgage in order to buy their investment property. According to Ratehub.ca, properties with one to four dwellings are zoned “residential” so the mortgage application process is similar to that of a principal residence. Alternately, a building with five units or more is zoned “commercial” and the mortgage application process is more complex. Keep in mind that the minimum down payment to purchase a non-owner-occupied income property is 20 percent.
Regardless of the size of the building, or whether you choose to live it in or not, Canada has enjoyed a record-low interest rate environment for the last decade. The low cost of borrowing makes an investment property attractive to those who may not be able to pay for their investment outright, but through their investment strategy expect to be able to carry the mortgage and other ongoing costs, hopefully with some money left over to spend, save or re-invest.
Other factors impacting ROI
A variety of things may impact your real estate investment, including (but not limited to) population growth and housing demand, local and world economies, interest rates, policies such as the mortgage stress test, the foreign buyer tax and vacant land tax, supply of resale homes and the rate of new construction.
But as the saying goes: no risk, no reward.
The good news is that Canadian real estate has historically yielded solid returns when held for the long term. According to the Canadian Real Estate Association, the average home price in Canada in 1984 was $76,351. Today in some Canadian housing markets like Toronto, that’s what you’ll need just for the down payment. By 1996 the average house price in Canada was $150,899. Now fast-forward to January 2020, when CREA reported an average price of $504,350. Granted, some housing markets see property values increase (or decline) faster than others, but if you bought a home in Canada back in 1984 and you still own it, odds are that you’re in line for a pretty solid return on your initial investment.
As a bonus, few other investment vehicles allow you to buy and use your asset while you watch your equity grow. Then, when you sell a principal residence, the income generated is not subject to income tax. Double bonus.
While long-term resale value is one way to make money in real estate, smart investors explore opportunities that allow them to earn now. After all, why not get some help paying off that mortgage?.
Building generational wealth by buying real estate
The sale of a principal residence, in the right location and at the right price, can certainly provide enough to boost, if not fully fund your retirement. But if building generational wealth by buying real estate is your objective, don’t hold your breath for the next 30 years in anticipation of appreciation. Explore how your property can start generating income now and into the future, without you (or your children) having to sell it.
Remember: a single rental property – purchased once, consistently well-maintained and smartly managed – can provide a source of income for generations to come.
Building wealth through rental properties
Want to know how to build wealth in real estate? A positive cash-flowing investment property means renting it out for more than you’re paying in the monthly mortgage, condo fees, property insurance, property tax, regular maintenance and those “unexpected” expenses that inevitably arise.
Before buying a property or narrowing down a neighbourhood, smart investors will have researched vacancy rates and average rents. A rising vacancy rate means more homes are available for rent – more competition for the landlord. A falling vacancy rate means there are fewer rental properties to choose from, giving an investment property owner the upper hand. Canada Mortgage and Housing Corporation release rental reports that provide a good high-level overview. It’s also a good idea to check local rental listings to see what properties are actually renting for.
Evaluating a location’s income potential requires a “bigger picture” perspective. Here are 12 questions to ask, according to Vancouver-based real estate research and consulting firm, Cutting Edge Research Inc.:
- Is the average income increasing faster than the provincial average?
- Is the population growing faster than the provincial average?
- Is the area creating jobs faster than the provincial average?
- Does the area have more than one major employer?
- Will the area benefit from an economic or real estate ripple effect?
- Has the political leadership created an atmosphere conducive to economic growth?
- Is the Economic Development Office progressive and helpful?
- Is the area’s infrastructure being built to handle the expected growth?
- Are there any major transportation improvements in the works?
- Is the area attractive to Baby Boomers’ lifestyle?
- Is there a short-term problem occurring that may be rectified in the future?
- Is there a noted increase in labour and material costs in the area?
Buy, rent, repeat. Pass it on. Sell it eventually… maybe.
Once you’ve landed on a good location, where the economy is chugging, the population is growing and demand is rising, tenants who pay the rent – and your mortgage – will follow. Barring any major upheaval, future generations who inherit the property can continue to earn on your initial investment.
Scottish-American industrialist, philanthropist and billionaire Andre Carnegie famously said that 90% of millionaires become so through real estate. There’s certainly something to this strategy. If you'd like to learn more about how to invest in real estate, click here to connect with the Sandy Smallbone Team.
Article courtesy of RE/MAX Canada | Content Manager Lydia McNutt.