Which Real Estate Investment Is Best For You?
Jas Takhar and Simeon Papailias, Co-Owners of REC Canada, explain the different types of real estate investment properties people can dive into. They discuss the benefits of each and what you need to know throughout the process. They stress the necessity of due diligence and putting your team together.
INVESTMENT PROPERTY TYPES
New-Build
What is it?
New-build or pre-construction is the purchasing of a dwelling, in many cases a condominium unit, from a floor plan, before it is built. Usually this is done 2-5 years before completion and allows purchasers the opportunity to buy real estate today, at today’s prices, before they need to close on it.
What are the benefits?
Completely passive as there is no maintenance or managing tenants for the entirety of the build-out period.
Because you are purchasing the unit for today’s values, your investment appreciates along with the market during the entirety of the construction phase.
Builders oftentimes increase prices along the sales cycling, further forcing the appreciation of the unit.
A mortgage is not required until the unit has been completed, allowing buyers the time needed, in many cases, to secure financing.
Deposits are paid in increments, meaning a purchaser can lock in a real estate investment without putting down the required 20% today.
Should you need to get out of the deal during the building process, in most cases, you can use your assignment clause to sell the paperwork to a new buyer.
New buildings are typically more desirable to older ones, allowing for an easier sell or rent.
Because a mortgage is not required upon purchase, some investors use the build-out time to purchase more properties.
What should I consider before purchasing?
Your deposit payments will be tied up for at least 2 years, in many times 4-5.
There is a slight possibility that the builder is unable to build. In this case, your deposits will be returned to you in full, however, you have lost the opportunity for the money to make you a return.
It can be difficult to purchase from a floor plan as you are unable to touch and see it; you will need to use your imagination.
You will be required to obtain a mortgage eventually, so a savvy purchasers knows that they need to use the build-out time to organize their finances to ensure a close.
There are additional fees associated with closing that you do not see with a resale purchase, such as: development charges, levies, and HST (although this is rebated back with proof of a tenancy agreement)
Contracts are written in favour of the developer and there is little room for negotiation.
Work pro formas can be difficult as values are a best guess.
What is the typical cost of entry?
Typically you can expect closing costs (including your deposits) of $125,000.
INCOME PROPERTIES
A property that usually has 2 or more livable units that can be rented out individually from one another. Typically this includes duplexes, triplexes and multiplexes although can be a single-family property or considered a commercial property.
What are the benefits?
With multiple tenants, there is less risk to your cash flow should one of spaces be vacant.
You’ll generally see higher cash flow due to the multiple tenants.
You can further add value to a property by converting it into multiple doors.
You own land and not just property in the sky, which historically speaking, appreciates more over time.
More secure compared to a new-build, because the asset already exists and there is a strong market for resale.
You have greater autonomy in what you choose to do with your property because their is no condominium corporation, for example Airbnb is a viable option.
What should I consider before purchasing?
The full 20% down payment is due now.
A mortgage is required now.
This is a less passive investment strategy compared to others because you are dealing with multiple tenants.
With multiple dwellers, a bigger reserve fund is required for repairs and maintenance.
Managing multiple tenants can be time consuming.
Co-operation between tenants can be difficult at times.
Many resale properties in the GTA go into multiple offers, making it difficult to source opportunities where the numbers work.
Often these investments are older buildings which may require massive renovations.
Your additional costs, such as insurance and property taxes will likely be higher than that of a single condo unit.
What is the typical cost of entry?
Typically, you can expect closing costs of $185,000.
Lease To Own
What is it?
This is when an investor acquires a property for a tenant-buyer who in return will purchase the property back from the investor in a predetermined time and with specified terms. Tenant’s lease payments are usually higher than market value with the additional portion being applied against the purchase price of the property on closing.
What are the benefits?
Highly passive because you do not need to continuously be looking for tenants.
Because the tenants will eventually be owners of the property, they tend to take greater care, decreasing maintenance costs and repairs.
You feel good because you are essentially helping a young family or first-time home buyer purchase a home they wouldn’t have otherwise been able to.
There is a predetermined exit strategy allowing you to plan further investments.
The agreement is written in a way that the tenant-buyer is only a tenant with an option to purchase, protecting the investor should rents not be paid or a closing is not able to occur.
If you currently own a property and are finding it difficult to find a purchaser, you may be able to find a tenant who is looking to purchase in the future, allowing you the ability to cover your expenses.
Both parties have a vested interest in making the deal work and so there is usually lots of flexibility from either side.
What should I consider before purchasing?
Finding qualified tenants can be a long process.
Not all tenants are able to come up with the funds available to close by the specified date and terms.
Your money is typically tied up for 4 years or more.
Single family homes in the GTA can oftentimes go into multiple offers, making it difficult for the numbers to make sense.
Depending on the market, you may agree on a sales price that ends up being lower than the market rate in the future.
If the agreed upon sales price is much higher than the market price at the time of closing, buyers may refuse to close or are unable to secure a mortgage.
What is the typical cost of entry?
Typically, you can expect closing costs of $150,000.
Joint Venture
What is it?
This is when investors partner together to obtain a property, leveraging each other’s individual capacities for financing, managing, repairs, and renovations, typically seen in larger projects. Usually, a JV is comprised of a real estate operator or “working partner” who has extensive experience in managing real estate properties or projects and a capital provider or “financial pattern” who supply the capital and ability to obtain financing.
What are the benefits?
It’s a complementary partnership because working partners bring industry expertise and are able to put a substantial amount of time toward ensuring the property is a success. Usually these partners no longer have the ability to secure financing and look toward finding new investors with less experience but have the down payment.
The financial partner has a fairly passive role in that oftentimes management and repairs are not their duties.
The working partner is able to purchase a property they otherwise wouldn’t have been able to, although do know that this partner is often provided with a smaller percentage of ownership.
Risks are mitigated between the parties.
Allows investors to purchase more properties in the future.
Gives investors the ability to invest in larger, more expensive projects.
What should I consider before purchasing?
Working with other partners can be risky because blame and the brunt of the work can be more easily displaced.
Terms, timelines and roles should be clearly communicated at the start.
Individual goals may change throughout ownership and may differ from the other investors.
As an individual you have less control over the property and are often required to compromise.
Many investors to choose to partner with friends and family which always poses a certain amount of risk to the relationship.
What is the typical cost of entry?
Typically, you can expect closing costs of $80,000 per partner.
Student Housing
Investing in temporary housing for students in close proximity to major university and college campuses.
What are the benefits?
Can be relatively passive, depending on property management arrangements.
Typically located in AAA locations which can appreciate faster than the rest of the market in a similar area.
Ongoing demand as university and college admittance rates are continuous and in most cases, rising.
Supply remains relatively low compared to growing demand.
These tend to be high cash-flowing investments.
Low eviction rates due to parental guarantees on leases.
This investment type is relatively recession proof because historically speaking, even in a down market, parents continue to send their children to school for higher education. In fact, during recessions, we’ve seen applications to universities rise.
Students do not require the same amenities that more mature tenants would expect.
What should I consider before purchasing?
Maintenance can be more demanding compared to other investments as students are constantly moving in and out.
High tenant turnover.
Tenant screening can be more difficult as students do not have much in terms of credit history.
Depending on the norms of the school, some leases may only be for 8 months of the year.
In the case of full year leases, many students opt to sub-lease.
What is the typical cost of entry?
Typically, you can expect closing costs of $90,000.
Mortgage And Equity
What is it?
Mortgage deals are when an investor lends money in the private mortgage space, syndicated mortgages, or land development capital raises.
Equity deals are when an investor commits capital toward a REITs (Real Estate Investment Trust), MIC (Mortgage Investment Corporation), or private construction loans and equity.
What are the benefits?
Completely passive as it only involves the exchange of capital.
Helps individuals who would not otherwise qualify for financing.
Gives investors the ability to choose some or all of the terms of their lending arrangements.
Registered fund eligibility gives investors a tremendous opportunity to control and grow their RSP portfolios (RRSP, LIRA, RRIF, TFSA)
What should I consider before purchasing?
Capital is not liquid for the duration of the term.
It’s common that the length of the term gets extended.
May or may not have monthly or annual dividends.
What is the typical cost of entry?
Typically, you require a minimum of $30,000.