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Is
investing in Real Estate Right for You?
There
are many ways to take part in the real estate market. You can invest in
property management companies, purchase a vacation property, and even
become a landlord. What's right for you will depend on your finances,
objectives, and your personality. Not everyone, for example, has what it
takes to be a landlord.
But
many of us do have what it takes to be homeowners. About 65% of Canadians
own homes and condos, which are probably our most valuable investment. In
fact, from the standpoint of diversification, you may already have enough
real estate exposure in your total portfolio.
But
if you're thinking of increasing your property exposure, this primer can
help.
Investing
in real estate
Here
are some of the most common ways to invest in real estate.
Invest
in property companies. If you want to diversify your investment
portfolio with real estate, but do not want to buy an actual piece of
property, you can purchase property companies or Real Estate Investment
Trusts (REITs) on the stock market. Real estate mutual funds — which
invest in both — are another option.
REITs
typically hold a number of income-producing properties in their
portfolios, such as apartments, hotels, and commercial shopping centres.
They aim to deliver their rental income to shareholders on a monthly
basis. However, unlike a GIC or a government bond, these investments are
not guaranteed to provide an income stream.
You'll
need a brokerage account (either self-managed or full-service) to purchase
shares of property companies or REITs.
Research
tip: Stay on top of
housing market developments with Scotiabank Economics' Real Estate Trends.
Buy
a vacation home. Many Canadians dream of purchasing a weekend getaway,
such as a cottage, and keeping it in the family for future generations.
If
you're thinking about a vacation home, be honest with yourself and your
family about what you really want.
How
often do you plan to use the property?
Can
you afford the purchase price and maintenance costs without having to
compromise on the other things you want out of life?
Are
you interested in an investment property or building your estate?
Most
financial institutions offer financing programs for vacation properties
and/or second homes. Depending on the type of property you buy, you may be
eligible to obtain financing for up to 95% of its value, subject to
approval by a mortgage default insurer.
Become
a landlord. Renting out an apartment in your home is one way of
becoming a landlord. Doing so can help make your mortgage payments more
manageable and allow you to become mortgage-free faster.
Another
approach is to buy a second home, condo, or small building to
generate steady income and a potential capital gain.
Building
a stake in the community may play a role in your decision to buy a rental
property. However, being a landlord involves a number of responsibilities.
These include:
Staying
on top of tenancy legislation.
Researching
any relevant bylaws.
Finding
tenants and collecting rent.
Keeping
detailed records.
Repairing
and maintaining the unit.
If
you're renting out several units, these duties may involve a substantial
commitment of time and money. Indeed, it's like running a small business.
The
Canada Mortgage and Housing Corporation has extensive resources on the
business and legal aspects of becoming a landlord.
Tax
tip. When you
borrow to generate income — such as rental income from a property —
the interest on your mortgage loan may be deductible. Learn more about the
tax treatment of rental income and other available deductions at the
Canada Revenue Agency site.
Build
a complete portfolio
Our
homes provide us with a place to live and can even help us borrow at more
attractive rates. But having additional investments in real estate may
leave you overexposed to one economic sector.
What's
more, direct investments in real estate, such as a rental condo or
vacation home, are much less liquid than other financial market
investments. Most mutual funds, for example, can be sold the same day, and
stocks can change hands every second.
That's
why diversification remains the key to financial health over the long
term. Your home and other real estate investments can help you build
equity; stocks and mutual funds allow you to take part in the growth of
the economy; and bonds and GICs add stability.
Your
financial advisor can help you assess the role of real estate in your
total portfolio and ensure that you are adequately diversified.
[Source:
Scotiabank My Vault]
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