If you ask a dozen so-called real estate experts and financial planners on whether it's the right time or how to invest in real estate, you’ll receive a dozen different opinions. It’s all about your personal needs and how you invest. If you play your cards the smart way, investing in real estate can lead to a nice, passive income stream for your retirement. It's also an ideal way to leverage and borrow against when values rise so you can buy more property.
Three ways to owning real estate are a) sole purchase and ownership of property, b) form a limited partnership to pool resources and enable the purchase of more expensive property, as well as share risks and returns, and c) indirect ownership of property by investing in REITs where you own shares. Today, I'm focusing on direct ownership of real estate and what options you have. Whether you're a seasoned investor or a novice, there's never really a better time to begin long-term investing because the market always shifts.
Before setting off down this path, speak with your bank or a trusted mortgage broker. Rules for down payments on investment properties differ from if you're buying a principal residence. In Vancouver, a minimum 50% down payment is required to generate a break-even monthly cash flow. With property prices so high in the lower mainland, the idea of buying a property and generating cash flow is a challenging feat unless you have a sizeable down payment. The biggest question to consider is: if I buy this property today, do I need an immediate income stream or am I fine with a break-even or possibly a negative cash flow for the first few years? If you do generate a rental loss, this can be used as a tax write-off at year’s end.
In the current financial climate, a lot of real estate investors in the lower mainland are buying with the expectation that property values will continue to rise, and not for current cash flow. This mind-set makes them more “real estate speculators”. If you’ve bought property in the lower mainland over the past 15 years, you've most likely seen a sizeable increase in its market value. Speculators, for the most part, have done very well. It's all about timing. If you bought a property in Vancouver in mid \-2007 and then sold it when the market fell by 20% in 2008/2009, you may have taken a loss. Buying real estate with a longer time horizon is a safer bet, allowing you to ride any market downturns. Short term investing is a lot riskier.
Buying property in Vancouver right now will typically generate a 2-4% Cap Rate depending on a number of factors. Many investors say this return is too low considering the risks and aggravation of owning a rental property. Other investors are just fine with these returns as they’re more focused on the expectation of rising market values. In the end, it’s your perspective that matters and is a personal decision.
If real estate is an attractive addition to your investment portfolio, we’re always available to offer professional perspective and tailored advice to your needs. Contact us to schedule a personal consultation and let's see how, together, we can create wealth and passive income for you and your family.
Here’s to a healthy and prosperous Spring 2016!
Andrew & Jill Hasman
(Photo: Alex Costin)