So you want to build wealth. With real estate. The only problem is, you don’t know how to start investing in real estate.
Is it too late? Do you need a lot of money to start? Is it risky? And what kind of real estate investments could you consider, especially if you haven’t started yet?
If you’re thinking about how to start investing in real estate…
…here are a few ways you can do it, along with pros and cons of each.
Buy a resale property and rent it out
This is known as real estate investing for rental income. Basically, you look for a resale property (it can be a freehold or condo). Calculate your purchase price and carrying costs. Figure out the rents in the area. If it’s cash flow positive, buy it and rent it out.
It might sound like a simple process, and generally it is. The tough work is in finding profitable rental properties on the market. With Toronto house prices jumping at stellar rates lately, you have to be extra careful in identifying the right rental property and buying it at a price that will yield a positive cashflow.
- Easy to get started, provided you have the money to buy property
- Information is readily available to help you identify profitable opportunities
- Rentals are in very high demand right now, so you will not have difficulty finding a renter
- High real estate prices make it challenging to yield positive cash flow
- You may have to spend money upfront to renovate older properties
- Finding the right tenant might be a challenge
Buy a resale property, renovate it, and sell it
If you’re looking for a ‘quick profit’ this is one way to do it. But beware. It’s tough to make a profit on flipping properties if you’re not experienced in this field. If you’re a licensed contractor, or if you have a network of home renovators and you’re good at numbers, you might want to explore this option.
If you’ve never renovated a house, or if you don’t know how to manage your costs and expenses to make enough of a profit margin, you should reconsider this. If you want to get started with flipping properties, find a mentor. Someone who has done several successful and profitable flips, not just one.
- It can be a quick way to earn profit if done right
- The profit potential can be lucrative in some areas of the city
- You gain experience with each flip you do
- You need to know how to manage costs and watch your profit margin
- A good network of contractors is required to do the job right
- No long term cashflow or appreciation earned — just profit on flips
Buy a pre-construction condo
Before you actually go out and buy a pre-construction condo, let me tell you that if you got into real estate investing ten years ago, and if you bought pre-construction condos to sell at profit or rent them out, you would have made a lot of money by now. I’ve worked with several clients who have done this.
In today’s market, some pre-construction condos are selling at or higher than market prices of existing condos! When you add other costs of buying a pre-construction condo, including development charges etc., you may be better off buying an existing resale condo and renting it out right away for cash flow.
Crunch your numbers. Consult with a real estate professional and your accountant. Check the agreement with a lawyer to see how much you could be on the hook for in additional charges on closing.
- You get to buy something brand new (yay)
- Condo rentals are in high demand right now
- Developments are going up in popular areas of the city
- Flipping new condos (buying new then selling when completed) is not as profitable as before
- Extra closing costs and development charges erode your profits
- The quality of some condos pales in comparison to some resale condos
Invest in commercial properties
You might be thinking of how to start investing in real estate properties and wondering if residential real estate is your only option. If you’re an experienced residential real estate investor and you’re looking to expand your horizons, consider investing in commercial properties such as multi-use buildings, plazas, industrial units or office buildings. You can even invest in land or land development.
- Diversify your real estate portfolio with residential and commercial properties
- Commercial tenants are more business savvy
- Appreciation for commercial properties can be high and lucrative
- Can be complicated if you do not understand commercial real estate
- Requires more resources and expertise
- Capital requirement may be a hindrance to some