Frothy real estate markets attract more than young families looking for new places to live - they inevitably draw out investors looking to make an epic return on rapidly rising prices.
It was the busiest October on record for realtors as the rebound in housing continued to gain momentum. Sales have been so strong that the Canadian Real Estate Association boosted its sales forecast for the year by 6.6 per cent to 460,200 units. Buyer enthusiasm has also led to record-high prices - the average is forecast to hit $317,900 by the end of the year.
The gains have been fuelled by record low mortgage rates - which means more of what is being paid on a mortgage is going toward paying the loan, rather than the interest.
One thing is clear - not everyone buying right now is looking for a place to live. Here's what you need to know before using real estate as an investment.
The upside
With prices set to gain 6.6 per cent in what was supposed to be one of the worst in Canadian real estate history, there is clearly some money to be made.
Those who invest in real estate say they like how they own something solid - they can get in their car and see what they own.
"Compared to a stock or a bond, a house is something tangible that doesn't see its value fluctuate on a daily basis," said Darryl Mitchell, the Toronto area manager at Royal LePage Real Estate Services. "Even in tough times, property holds on to its value."
|
Investor Education:
|
Other benefits to investing in property go beyond income - tax benefits can be had. Investors are essentially running a small business, and can claim such expenses as landscaping or renovations on their own taxes. Other writeoffs include interest on the loan and any property taxes.
"Property can also be borrowed against, which you can't really do with a stock or a bond," Mr. Mitchell said.
Money, money, money
It's no secret that low mortgage rates are drawing investors into the market. Someone could buy a $300,000 townhouse with as little as 5 per cent down, putting the initial cost of investment at about $15,000.
Rents pay down the mortgage, and the principal can vanish pretty quickly as long as rates stay low.
While many people think of how the steady stream of income will help pad their own pockets as faithful residents drop their payments in the mail each month, there are other considerations that many people overlook, said Jim Rawson, a Toronto-based regional manager with mortgage broker Invis.
"Any loans you take out for an investment are still going to affect your credit rating," he said.
"Everyone thinks it won't affect their credit rating because it's an investment, but that isn't the case."
He also said it's important to ensure an investor can make payments regardless of their tenants. If not, a mortgage provider is unlikely to provide the financing needed to get into the market.
The bigger the down payment, the less likely this will be an issue.
"If you put 50 per cent down, then they may be less inclined to worry about such issues," he said.
Get some help
Running rental properties isn't something people know how to do intuitively, Mr. Mitchell said. Most will have to hire an accountant and a lawyer at the very least to make sure everything runs smoothly. Other sources for help across the country include investment clubs and organizations such as the Professional Real Estate Investors Group of Canada which holds monthly meetings where investors meet to learn from each other and guest speakers.
