Most Torontonians know real estate is a good investment, but many aren’t entirely sure how it works. What does the process look like? The truth is, there a few basic investment strategies, and they all come with their own pros and cons. While each one can be lucrative, knowing the essentials will help you determine which approach is right for you.
Here are four different real estate investments for beginners to consider…
1) Purchase a home
The most common way to invest in real estate is by purchasing a home to call your own. By buying a property, maintaining it, and slowly paying off the loan you take to make your purchase, you can build your equity and secure your future. Here’s how it works.
While you own your home after closing, your lender still has a stake in it. The portion you own outright grows every time you make a mortgage payment. Through this process, you build equity—a valuable asset that you can tap into when you need it.
At the same time, your home will almost certainly be growing value. While the market changes year-to-year, Toronto real estate typically appreciates at about 5 to 6 per cent annually. The result can be a sizeable profit when you decide to sell.
2) Buy and hold
Buying and holding is a long-term strategy whereby an investor purchases a piece of property and rents it out over an extended period. When it’s done right, this method provides the best of both worlds: passive monthly income, and a tidy profit when it’s eventually time to sell.
It’s important to understand the work that goes into being a landlord. It means learning and adhering to the residential tenancies act, maintaining your property and access to all essential services, and responding to tenants in a timely manner. Depending on how much time you have to give, working with a property manager may be advisable.
The success of this strategy hinges largely on your ability to find the right space. That means choosing an in-demand property type in a popular or up-and-coming location. Fortunately, a knowledgeable local agent can help you find the ideal place.
3) Fix and flip
Favoured by enterprising real estate investors, a fix-and-flip strategy consists of purchasing a property, renovating it extensively, and then selling it relatively quickly at a profit. This approach can be quite labour-intensive, making it well suited for those who enjoy the process.
First, you’ll need to find a property at below market value that checks all the relevant boxes. It should be a place that requires more work than most buyers are willing to put in—but one that’s not a total money pit. From there, you’ll need to budget for closing, renovation, and carrying costs. Once the property has been flipped, you’ll have to find a buyer and go through the selling process.
Research, business planning, coordination, and follow-through—you’ll need to do it all if you’re planning to fix and flip a home. If you have the time and are dedicated, there is the potential to make an impressive, relatively quick profit.
Compared to other methods of property investing, REITs tend to be hands-off. Real Estate Investment Trusts (REITs) are units similar to shares, and they’re traded on the open market. Here’s how it works.
Investor money allows REITs to purchase pieces of property, which could include anything from housing complexes to retail buildings. The rents collected go in part toward expenses, but most of this income is distributed to those who invested.
Going this route will allow you to avoid the responsibilities of being a landlord, and get into the investment game without a lot of capital. On the other hand, you won’t have the same access to leverage as you would with a piece of real estate. In many cases, you can get a significant loan to buy a property and rent it out—and maximize your returns as its value rises.
The potential benefits of investing in real estate are significant, but getting started can seem intimidating. By getting familiar with the landscape—and working with a knowledgeable agent—you can make this type of investment work for you.
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