The Vault
Is investing in real estate right for you?
by Graham Barber

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 depends 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 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 (REIT) on the stock market. Real estate mutual funds - which invest in both - are another option.

REITs typically hold a number of incomeproducing properties in their portfolios, such as apartments, hotels or commercial shopping centres. They aim to deliver their rental income to shareholders on a monthly basis. However, unlike a GIC or government bond, these investments are not guaranteed to provide an income stream.

You'll need a brokerage account (either selfmanaged 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, 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.

Becoming 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. They include;

- Staying on top of tenancy legislation

- Researching any relevant by-laws

- 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 mush 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; the bonds and GICs add stability.

The proceeding information was provided by Graham Barber, Branch Manager of Scotiabank, Alcona Branch.

The Scotiabank, Alcona Branch, is located at 1161 Innisfil Beach Road, (705) 431-6116.

The Vault is a weekly series of articles provided by Graham Barber with financial advice and suggestions.