Tips from the professionals on how to make your mark in real estate investing
With the Canadian real estate market – be it residential, industrial or commercial – showing resiliency in the wake of the recession, property as an asset class is drawing investors with the promise of higher returns on hard assets.
After watching their wealth evaporate on the stock market, many investors are drawn to the property market because they want to be able to look at what they just bought, said Queen’s University professor John Andrew, who specializes in investment real estate.
“Historically real estate has been a haven in times of inflation,” he said. “It’s also been a place where people feel they have an understanding of what they’ve just done – they can walk down the street and see their purchase.”
That said, it can be a risky proposition. If this recession has taught us anything, it’s that property values can plummet, and fast. You just can’t buy a building and walk away. But if you have the nerve, here are some tips from the professionals on how to make your mark in real estate.
Getting started
Real estate investment trusts are the most passive way to get involved. These companies have units that are publicly traded, which means you own a share of the REIT rather than a piece of real estate. The sector is small in Canada, with fewer than 20 publicly traded REITs, but the well-funded companies have been actively adding properties to their portfolios in a bid to generate more income for their investors.
The first few weeks of this year haven’t been particularly great for the REITs, with the S&P/TSX Capped REIT index (which tracks the companies) gaining 2 per cent, but it’s still above the overall market’s .9-per-cent decline. For the past 12 months, the index has gained 60.8 per cent.
“This is a good way for a passive investor to get involved with real estate with fewer of the headaches,” Prof. Andrew said.
A little deeper
While the $12-million office building around the corner keeps catching your eye, maybe you find the price tag a little hefty. If only there was a way you could pool your resources with other cash-strapped millionaires.
Turns out, there is. Brokers around the country are constantly putting together syndicates – groups of private investors who want to pool their money and share ownership of attractive properties.
Jason Shiner of Ottawa’s District Realty said most deals involve investments of $100,000 to $250,000. The key is to ask questions before joining.
“You want to look at who you are partnering with, what rules there are about who can join, what are the exit strategies,” he said. “You don’t want to be the weakest link, or the strongest, you all want to have about the same amount at stake.”
For the big player
These investors – and if you’re one of them, you probably already know this – tend to purchase retail and industrial properties and keep them in the family. When they want to do a deal, they pick up the phone and call someone such as Michael Turner, an executive vice-president at CB Richard Ellis who specializes in private investments.
The country’s most expensive cities aren’t their primary targets. They opt instead for smaller markets where pension funds and real estate investment funds couldn’t be bothered to go shopping.
“They prefer places like Atlantic Canada, or smaller Prairie cities,” Mr. Turner says.
Joys of rental properties
The dream of home ownership isn’t the motivating factor for those buying rental properties – it’s the dream of a steady stream of cash as dream tenants make their payments on time and take extra care not to scratch the hardwood.
Of course, you’re just as likely to hand over the keys to someone who looks trustworthy but then decides that paying rent is for chumps. Worse yet, your unit could sit empty for months as expensive classified ads fail to draw anyone to your doorstep.
But for this exercise, let’s ignore the nightmare scenario and focus on the deal. Interest rates are at all-time lows, which means more of the cash that is generated each month can go toward paying off your mortgage. And with a 5-per-cent down payment, the barriers to entry are actually quite low (one caution – you carry that mortgage on your personal credit report).
And unless you want to spend a lot of time doing maintenance, a property manager is a must.
“If you are not handy, then get a manager,” Ottawa property investor Chris Jurewicz said. “If you do not want to be tied to your cellphone 24×7, you need one. It sounds like a lot of money at 4 to 6 per cent of revenue, but see if you would want to do it for that amount of money.”
Source: Steve Ladurantaye of The Globe & Mail (www.TheGlobeAndMail.com)
