Updated: Oct 20
There are many different strategies available for those that want to invest in Canadian real estate. There are technology companies (PropTech), REITs, and investment funds for retail investors and for those brave souls that want to step into the world of land lording, we have a robust real estate market in Canada that has been appreciating at rapid rates over the years. For this cohort, there are again many options available and no one can be an expert in all of them. There is a saying in the business world, niches bring riches. Pick a strategy that fits your risk tolerance and experience level and become an expert in it. Here are some different real estate investment strategies that landlords are using in Canada today to retain and build wealth for themselves and their families. They can be broken down into two categories that are largely defined by revenue Canada as active and passive income.
Buying a run-down house for the purpose of renovating it and putting it back on the market upon completion is generally considered active income. In the eyes of the CRA, the house is inventory and is basically something that was bought with the intention of reselling. This is something that you should talk to your accountant about, as there are potential tax savings with using a corporation versus owning personally. House flipping can be a very lucrative business, especially with the market we have been seeing over the last few years. When evaluating a potential deal, it is best to start with an after-repair value (ARV) in mind. From there, subtract a profit margin of 20 – 30%, holding costs during the renovations, and subtract the renovation cost to identify a good purchase price. Keep in mind that renovations almost always end up going over budget, there are lawyer fees, land transfer tax and realtor fees to consider. That profit margin of 20 – 30% can get eaten up quickly if you are off on cost estimates. Potential pitfalls can occur if you are investing long distance and are hiring contractors that you are unable to check up on and if you aren’t familiar with the trades in the area that you are investing in. Short term market corrections, renovation delays and mismanaged renovation deals are the biggest hurdles that need to be overcome.
Short Term Rentals
Buying a home with the purpose of renting it out on a short-term rental site like Airbnb can be a solid business plan. The cash flow from these types of properties can be much higher than long term rentals, especially in the busy tourist months. Some pitfalls here include the fact that it might be hard to finance a property if the broker is aware that you are using it for Airbnb. The banks don’t tend to use STR income when qualifying you for your next property. The tax implications can be surprising when you sell a property that was used as a STR as well. CRA looks at the property as something that generates active business income and HST can become applicable on the sale/purchase of the property. No one is going to pay market price plus HST, so you as the seller may be responsible for sending 13% of the sale of the house to the government. Again, best to talk to your accountant about this. Practically, STR properties are higher maintenance than a long term buy and hold and take some coordination with cleaners and clients. They are also more expensive to set up, as the property must be furnished and decorated well, and advertising must be paid for. Also, you must be comfortable with good months and lean months as the seasons and demand changes. Also, you should check the local municipal bylaws to see if STR are allowed under the regulations and if there is a licensing system that is coming into play. All these things should be considered before getting into the STR market.
Land/Development/ Garden suites/Laneway suites/severances
This is a massive group that can range from small brown field or infill development such as purchasing a lot and building on it or the creation of new lots through severances all the way up to the massive land acquisitions that developers acquire 50 years before urban sprawl reaches them. Some of the biggest wealth can be created through the purchase and long term development of land in projected growth areas but you need to have very deep pockets and a lot of staying power.
Passive Income Investments
Any property that you are purchasing with the intention of renting out to long term tenants would fall under a passive income investment with the CRA. Under this umbrella, there are a few strategies.
BRRRR stands for buy, renovate, rent out, remortgage, repeat. This is self explanatory and is a strategy that many investors have used to grow their wealth and investment holdings. The idea here is for a perfect BRRRR. That means that upon refinance, you can pull out your entire down payment amount and your entire renovation cost, leaving you controlling and owning an asset that you have no money left in. This process may take a few years, as market appreciation catches up enough to allow you to pull out your entire investment. Something to watch out for here is that once you refinance, the property must still cash flow. There is no point in refinancing the property and pulling all your money out, if rents won’t cover the new mortgage amount.
These properties are typically single family homes that have the potential to put an additional suite in the basement to create two rental units out of one single family home. This could also be any multi unit residential building that has the potential to add an additional unit to it to increase the cash flow. The idea it complete a renovation and then refinance it to pull out the majority of your renovation cost and fill the additional unit to pay for the increased cost of the mortgage.
Single Family Homes
These tend to get rented out when someone moves out of their starter home into a bigger place and decides to keep their first home as a passive investment. Depending on where you are, the rent you would get from renting out a full house may not offset the cost to purchase a single family home for the sole purpose of renting it. The exception here is a rent to own program that can be covered here.
Purchasing a property in proximity to a university or college can be a lucrative way to create cash flow in any given property. There will be higher maintenance costs and more turn over, but you can rent out the house by the room which will generate more income for you at the end of the month.
Multi unit Investment
Multi unit investing can be a very lucrative way to invest in real estate. The big thing here is that you are diversified a bit. If one person stops paying rent for whatever reason, you still have at least one other person to help pay your bills! This is a huge category that can range from a simple duplex up to large apartment towers. Here is a recent blog post breaking down the details on multi unit investing in Ontario.
There are many ways to create wealth and invest in real estate in Canada. We didn’t even get into any of the commercial applications here such as strip malls, industrial and commercial buildings, storage facilities and trailer parks.
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Real Estate Investor and Entrepreneur
Jonathan Beam is a real estate investor in the Niagara region who is passionate about helping you achieve financial freedom through real estate. He works with new and experienced investors to formulate a plan that fits your specific situation and provides market guidance and consultation on the best places and strategies to pursue within the Niagara Region. Book a free, half hour no obligation consultation to see how he can help you to achieve your goals. His travels are available at www.realestateandrepeat.com
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