For many people, real estate feels more comfortable than other investments. They understand the market better and like that their 'investment' isn't just on paper but they can actually put it to use. They also like having control of it and being able to increase the value of their asset by maintaining or improving it.
People often tell us that their real estate has outperformed their other investments. With interest rates so low, cash in the bank isn't earning much. While the stock market has potential for a higher return, it's volatile and can be difficult even for the experts to make the right choices.
A key advantage of real estate is that if the market drops in value, property still has utility - whether you live in it, rent it or vacation there. If you're investing with a longer time horizon, a dip in market values doesn't necessarily have a negative impact on the role your property plays in your life.
Some things to consider as a potential investor...
- Risk vs. Return - there are no guarantees in life or real estate! Finding the best balance of risk and potential return for you is a personal thing and only you know what your risk tolerance is. &
- Clear Goals - consider your time frame and your primary goal...is it safety of principal, capital gains, leaving a legacy or producing an income? Consider the tax implications.
There are lots of ways to approach real estate investing but let’s focus today on renting.
Student housing is certainly one option to consider. It’s a great source of rental income but does require an investor with a risk tolerance in keeping with a houseful of young people. It’s a good choice if you want to supplement your current income or build a portfolio of rental properties in place of a pension for example. As parents to one of those students, it can help pay for their education.
Opportunities are best in smaller cities with a large University where house prices are lower such as St Catherines, Guelph or Brantford. Typically these homes have 4-6 bedrooms - students prefer it and as the landlord you'll get the highest possible cash flow. If you are converting a home to student housing for the first time, you may need to create bedrooms.
Proximity to the campus and transit will have the biggest impact on demand and rental rates. The condition of the home will also affect rents but you don't need high end finishes to get top dollar so it makes purchasing at the lower end of the market possible.
If you get a good group of 2nd year students, you can have stable tenants for 3-4 years at a time. A group lease is preferred for managing tenants, how they maintain the property and so on but it is also a requirement of lenders who will not finance a boarding house approach. See the back cover for more details on financing.
If you'd prefer a mature tenant or an area where prices are higher, it isn't easy to find properties that will be cash positive from the get go. So the question is...does it make sense to buy an investment property that has a negative cash flow?
Absolutely, the right property is an investment for your future, like an RRSP contribution. If you are looking for long term capital gains and don't need income right now, it can be a good thing even if it costs you a few hundred dollars a month. Focus on buying in an area that you expect will appreciate well over time.
Although cash flow is negative you are still building wealth overall and that's key. In your high earning years, income may not even be desirable. Overtime as you build equity, it may pay you an income when you need it. Alternatively, you can move into it, pass it down to the next generation or sell it when the time is right. That's the beauty of real estate, it serves many purposes.