4 Fundamental Considerations before Investing in Real Estate

by REICO on 15 September 2015

Over 17,000 years ago mankind transitioned from a nomadic way of life to the pseudo-agrarian lifestyles we live today, and for nearly as long, mankind has – in some form or another – realized the potential of investing in real estate. Real estate investing has taken many forms over the ages from the tribal hierarchies of our ancestors, to the medieval serfdoms of Europe, to the free enterprise in which we live today. One thing has remained constant throughout human history: the desire to invest in property.

The point here is that there is something about investing in real estate that seems to make inherent sense compared to other forms of investment. There’s something about owning land and receiving income from it that provides us not only with revenue, but a sense of pride. It’s an investment one can physically see, touch and alter; an investment that one can show to others, check in on, walk through and, to some extents, control through actions like renovation. There are endless speculations on why investing in real estate has been a persistent enterprise throughout human history. But at the forefront of our urge to rent properties to tenants or sell them at appreciated values is that there are few investments that can rival the potential to grow wealth like that of real estate.

Real estate investing, now more than ever, is an accessible vehicle to build and grow your capital into a robust multi-million dollar portfolio, whether you’re the greenest of green investors or the most seasoned of tycoons. If you are considering investing in real estate for your first time or would like to rebalance your existing portfolio REICO has the tools, knowledge and networks to facilitate your success.

#1 – Your First Income Property

If you’re reading this, chances are that you’ve been considering investing in real estate for some time now but you’ve realized that there’s a lot to learn before committing your hard earned dollars and credit to this investment. And you’re absolutely right: investing in real estate is no small commitment and it isn’t for those looking to make their fortune overnight. Investing in real estate is a venture that requires time, maintenance, wisdom and patience – but like most things in life that involve delayed gratification, the fruits of your efforts can be bountiful.

Consider this potential investment in Ontario:

*Note: see appendix for detailed example

There are essentially two methods – or a combination of both – in which this investment will provide you with a return:

1. Investing as a Rental Property: As you can see, even if you were to only pay your minimum mortgage payment on this property you would own this property outright in 25 years all the while clearing $48,432 in rent per year (before debt servicing). Once the mortgage has been repaid, the only deduction from your profits will be overhead costs such as maintenance and property taxes. or
2. Value Investing The reason that investing in real estate is such an attractive option is that property tends to appreciate in value over time, especially in growing regions such as Ontario. It’s not unreasonable to assume that the aforementioned property that sells for $495,000 could sell for something like $1,036,420* in 25 years. In other words, by investing in this property now, even if that requires a mortgage, you stand to gain significantly at the time of reselling this property.

*Projected growth and appreciation values are provided as demonstration purposes only. REICO makes no guarantees nor assumes any responsibility for consequences of market behavior.

#2 – Building a Portfolio of Properties Yields Larger Returns

Whether you plan on investing in real estate with the intention of renting to tenants, selling that real estate at an appreciated value, or a combination of the two you have the ability to create substantial wealth through real estate.

For those with more modest aspirations, a single investment in real estate may be all that is needed to reach their goals, but for those looking to significantly improve their financial situation creating a well-rounded, diversified, multi-property portfolio is the key. Not only does investing in multiple properties mean larger amounts of revenue – as you’d expect – it also offers the investor risk mitigation: a well balanced portfolio of real estate investments diversifies the markets in which you are invested. If one market does not appreciate as you’d expected it’s likely that another market you’re invested in will have a compensatory effect. In effect, you’re hedging your bets with the intention of producing a net-positive average for your portfolio.

The method you’d like to use to grow your wealth is your business, knowing how is ours. REICO is Ontario’s leader in real estate, mortgaging and financing. We have a network of resources and experts to help you build your first or n^th real estate investment portfolio.

#3 – The Allure of Investing Locally

Location, location, location: you’ve heard this golden rule many times before and for good reason. But how does one determine where that ideal location is?

When deciding where to find a profitable real estate investment, investors have been known to use a multitude of guidelines. For instance, an investor may consider:

• ~The fundamental variables impacting real estate markets in different cities, provinces, or countries
• ~Investing within a geographical radius of 100-200 km. from a major city centre, such as the Greater Toronto Area
• ~Investing in an area based on their personal situation, beliefs, and research
• ~Investing in the area in which they live: this is a common choice and one that warrants some discussion

There is a persistent allure of investing in the region in which one currently lives that real estate investors must address earnestly. An investor may be tempted to invest locally for any number of reasons: the investor may perceive investing outside of his or her region as risky; the investor may want to personally perform check-ins or inspections of his or her investment; the investor may want to avoid the use of property management companies; the investor may have confidence (validated or not) in their own market; or perhaps he/she wants to take a hands-on approach and the logistics of commuting to do so just aren’t feasible.

In any case, there are benefits to investing locally and, depending on the particular market, it may even be justifiable for the investor, but from a true investment perspective limiting your potential investments to your local area for the sake of physical convenience is a pitfall and a contributor to missed opportunity. Spend some time comparing markets to the one in which you live with research tools like this one offered by Canada Mortgage & Housing Corporation.

Real estate investment requires an open mind to all possibilities, both near and far, to determine which opportunities will yield the greatest results. And that’s where we come in. Through REICO you have access to extensive lists of properties across Ontario that have been vetted for their lucrative potentials. We can help you to find the real estate investment that is perfect for your goals.

#4 – The Economic Effect

As has been mentioned, there is an innate pull for novice investors to seek opportunities in their own regions, even at the expense of missed opportunities and sometimes – in extreme cases – it can result in downright poor investments. When considering a local real estate investment, potential investors would do well to learn about the possible consequences of not considering all of their options. In very general terms, the main disadvantages of not considering other markets when building a real estate portfolio is that your portfolio will be more susceptible to market risk, it may not maximize its potential cash flow, and you may never reach the appreciation value that you’d once expected of your investment.

In order to reap reward from a property, one must have a basic awareness of the economic forces that will impact one’s real estate portfolio.

The fundamental model to increasing a property’s value is as follows:

Economic Growth     => =>      Increased Demand     => =>    ‘Unforced’ Appreciation

In other words, as a city grows economically it tends to have a positive impact on job growth, which attracts underemployed individuals to the area who then become economically contributing residents. This surge in population will increase the demand on rentals, ultimately decreasing the available supply of vacancies, leading to increased rent prices. If the area experiences enough growth to push rental prices high enough, it will result in increased property values because individuals who were once renters can no longer justify not buying a home and enter into the homeownership market.

Similarly, because of the increased rental trend, real estate investors purchase properties in the area to capitalize on the opportunity. Again, as the demand for property ownership goes up, the supply goes down, resulting in appreciated property values.

The key to successful real estate investing is knowing where and when these spurts of economic growth are going to happen, and investing before property values inflate; simply put, the basic concept of buy-low, sell-high applies.

Sophisticated investors take many factors into consideration to help them justify the specific province, city and neighbourhood in which to invest.

Below is a partial list:

• ~Provinces with highest GDP
• ~Provinces with positive growth oriented policies
• ~Provinces with strongest industries
• ~Cities with rising median home values
• ~Cities with highest median sales increases
• ~Cities with highest rate of price appreciation
• ~Neighbourhoods with lowest crime rates & most accessible amenities
• ~Cities with highest income levels
• ~Cities with highest job growth
• ~Cities with most diverse demographics
• ~Number of foreclosures vs. DOM for foreclosures
• ~Cities with highest foreign investment capital
• ~Cities with highest migration
• ~Cities with highest immigration
• ~Best business friendly cities

The aforementioned have a strong impact on the profitability of real estate investments. Through our comprehensive resources, networks, and specialists, REICO will empower you to identify these criteria for properties that are contending for your investment portfolio.

Conclusion

Whether you’re considering investing in your first real estate venture, growing your current portfolio, or would simply like to know how real estate investment could benefit your financial aspirations, we’re here to help. REICO is Ontario’s trusted source for real estate investment. We’ll help you to build your wealth, enhance your retirement savings or supplement your pension. Welcome to unbridled opportunity.