Real estate is much like the stock market in that there's an inherent amount of risk attached. No matter how much instinct the investor has or how much research they do, there are no guarantees when it comes to predicting property prices. However, there are ways to mitigate the risk once people understand more about the available choices on the market. Learn more about the major types of real estate investment and how each one can impact the investment experience.
An Abridged Glossary
Understanding real estate starts with understanding the jargon attached to the industry.
- Commercial: This term usually refers to office or retail space, but it can also apply to residential buildings (e.g., apartment complex, etc.) of a certain size. Different provinces will have their own rules on how many units are needed before the property can be considered commercial.
- Residential: This term applies to buying single-family homes, townhomes, and duplexes. It may even apply to a small apartment complex.
- Co-op: A co-op refers to a property that is owned by a corporation instead of individual investors. The investors will buy shares of the company equal to the going rate of each unit of the property.
- Strata: Strata properties are available only in certain provinces of the country. Instead of buying just a unit within a complex, investors will also share ownership in the common areas of the building as well. This gives investors additional influence on how much is spent on repairs and maintenance to the larger structure.
Real Estate Rentals
Rental property can either by commercial or residential, and it's the most common way owners engage in real estate investment. Rental agreements can be short- or long-term, and each province has their own restrictions on what owners can and cannot do. As sharing websites like Airbnb have grown in popularity, certain neighborhoods have made it their mission to cut down on the unknowns of mass short-term renting. Some co-ops won't even allow owners to rent their property to anyone else. If they do, they'll impose strict rules that can make it difficult to make money.
Home and Commercial Flips
Flips can be an extremely lucrative option for real estate investors, especially if they can find dilapidated homes in popular areas. However, this choice also takes quite a bit of skill to pull off. There's a lot of time and effort put into flips—whether owners do the work themselves or not. Between permit laws, coding regulations, and fly-by-night contractors, there are plenty of pitfalls that can eat into profits. Investors who understand how to manipulate the renovations market to their advantage will likely do well in flipping, but it can take a while for a beginner to get off the ground.
A Westmount real estate investment trust is one where investors give money to a primary property owner for a stake in the land. It's one of the more passive ways an investor can make money because they're not required to manage the property in any way. This means the rewards won't be as high as if an investor had purchased on their own, but it also decreases the overall risk.
A REIT will normally spread an investor's money out over several properties, so any losses can easily be absorbed by higher performing properties. Investors who choose this option should do their research before choosing a partner. Some REITs are excellent about sending investors the updates they need to make smart choices, while others may not have the communication investors need to remain confident.
For investors who want to turn a hefty profit without putting in much effort, buying vacant land can be an ideal solution. With vacant land, an investor buys the land, holds onto it, and then sells it to an eager developer who's desperate to build an apartment complex. Of course, this is an ideal scenario for the investor. In reality, vacant land can be risky for investors if they choose the wrong plot.
Between property taxes and cost of maintenance, holding onto vacant land can be expensive and investors won't know for sure when the right offer will come along. Make sure to check the zoning restrictions of the land before buying so there are no unpleasant surprises later on. Some vacant land will become a dumping ground for nearby residents, destroying its value over time.
There's a lot to consider about real estate before getting started, but investors can make smarter moves once they understand the principles that govern the industry. No matter how you choose to invest, there are advantages that can make it possible to turn a strong profit.
By Justin Havre