Skip to main content

The Globe and Mail

Looking at property? Be careful what you step in

Various real estate signs from the midtown area in Toronto, Ontario, Canada of office space for lease, houses for sale and sold.

Deborah Baic/The Globe and Mail

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.

Story continues below advertisement

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:

  • Should I buy a home now, or wait and save more money?
  • Understanding house prices
  • Is it better to buy a home, or choose some other investment? Charlie's story
  • What makes buying a home different from other investments?
  • What are some renovations that add value to my home?

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.

Story continues below advertisement

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."

Story continues below advertisement

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.

"We emphasize education, market research and due diligence," said Navtaj Chandhoke, who founded the group and has helped it grow to more than 4,000 members. "It's important people seek information, but only from seasoned professionals and experts instead of neighbours, co-workers, friends and relatives."

A recreational option

Before the recession, recreational properties would generate thousands of dollars a week for landlords as concrete-weary city dwellers happily paid big bucks to escape the city.

But maybe now isn't the time to cottage-hunt in the Muskokas, said David Ford, a partner at Calgary investment firm Ignite Strategic Inc.

"Investment is important but should not be the catalyst, although we certainly see mid- to long-term upside," he said. "The priority should be on acquiring a legacy property that enriches your family's life and experiences and provides a sense of escapism. Look for uniqueness - opportunities that are unique, authentic and relevant."

If you insist on treating a getaway as a cash generator, he said it's essential to check into the developer's background. Financing is difficult, and some promised projects are unlikely to ever see the light of day.

The same goes for any new development, regardless of its location.

"Now more than ever it is critical to assess the financial stability of the developer and assess whether they have the financial means to execute on the vision," he said. "Dig deep to determine if the project is highly leveraged or if it is financially positioned to deliver for the long term."

The doomsday scenario

Not everyone is enamoured of the Canadian real estate market. Financial author and former member of Parliament Garth Turner has been talking himself hoarse warning against speculating in what he believes to be a doomed market.

He said the current run in prices is being fuelled by record low interest rates, and any gains are liable to be erased as the Bank of Canada moves rates higher and makes many current mortgages unaffordable for homeowners.

The recession that gripped the world over the last two years was rooted in inflated U.S. real estate prices, as those with bad credit obtained easy mortgages and drove prices to unsustainable levels. Some markets -such as Phoenix - have seen prices fall more than 50 per cent as foreclosures rise and homeowners give up on their houses.

"Currently real estate is a fad, a fetish, a desire," he said. "It is being bid higher in a bubble by a large whack of new buyers who could not afford a home if rates were returned to historic levels.

"So, an investor in residential real estate today is gambling."

Another downside

You can't invest in real estate without dealing with tenants. And that, for many landlords, is the single biggest challenge they will face.

"A good reminder is that many tenants tend to not respect their rental property as they would if it were their own, so there always seems to be something that needs to be fixed or replaced," said Amy Olah, a marketing manager at Wellington Financial LP who owns rental properties in Guelph.

Ottawa-based consultant Chris Jurewicz owns two small apartment buildings totalling 14 units and a townhouse, and warns that tenants usually know more about their rights than landlords do. It's essential to check tenants out thoroughly, including credit checks. And if you don't want to deal with them 24 hours a day, a professional property manager can help.

"It sounds like a lot of money to pay up to six per cent of your revenue," said Mr. Jurewicz. "But investigate starting your own property manager business to see if you would want to do it for that amount of money."

Report an error Licensing Options
Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.