Long before the stock market existed, before salt was considered as valuable as gold and before humans first struck oil, the asset that was most sought after was land. Real estate investing has evolved, but today investors still seek out land as a way to diversify their assets, earn income, and increase their net worth.
These days, however, many Calgarians are asking whether or not real estate is still a good investment. The question is timely given the local and national housing market with today’s health and economic instability.
Starting in 2016—when the Greater Toronto and Greater Vancouver markets were thought to be in bubble-territory—governments began to introduce a series of taxes and mortgage rules. The aim was to slow down those heated housing markets—and it worked. By 2018, the national average annual sales price dropped 3.9 percent to $488,668, according to the Canadian Real Estate Association’s data. During that same year, sales activity dropped by almost 11 percent. This had an impact on Calgary housing sales as well.
But the biggest supporters of real estate, as an investment asset class, were unphased. Many saw their personal net worth grow significantly due to real estate investments.
There are many ways to build wealth, but not everyone is inclined to do it through real estate. The question isn’t whether or not real estate is a good investment, but is real estate the best investment for you?
Treat real estate investing as a business
For many, the first foray into real estate as an investment is through the purchase of a primary residence. The time and dedication required to research, investigate, and analyze this purchase helps people appreciate what is required to find a good investment property when they start to build their property portfolio—but they tend to focus on just two factors: purchase price and potential sale price. For seasoned investors, these are the wrong targets. Many experienced investors know that it is all about cash flow, leverage and appreciation — and that can work in any market.
While it can be harder to find a cash-flow positive property in higher-priced neighbourhoods, it is not impossible, particularly if you have a strategy to increase your equity (such as making building improvements) or saving up for a larger down payment.
Cash Flow, Leverage and Appreciation
Cash flow is simply what is leftover when you take the total earned from a property (rent) after you subtract all the property expenses, and positive cash flow is what most new investors are looking for.
Real estate allows you to use the power of leverage. An investor may only have to pay 20 percent of the purchase price to own 100 percent of the asset; you leverage a portion of your own money to own an asset worth much more, with the potential to increase in value over time. If that same investor were to invest in gold, stock, equities or even Bitcoin, chances are they’d need the full 100 percent of the purchase cost. That is the power of leverage.
Add appreciation to leverage, and many investors see the compounding effects of real estate in building wealth. When a property appreciates in value, the full 100 percent of the property appreciates, not just the 20 percent that the investor utilized for the purchase. Simple math would tell us that should a property appreciate by 1 percent, the investor’s 20 percent investment would have virtually increased by 5 percent. That is the power of appreciation and leverage combined.
Manage the risks
Real estate investment offers passive income and a way to diversify your portfolio, but it’s not without risks. Here are strategies to mitigate the most significant risks an investor faces when investing in real estate:
Risk #1: Taking on additional debt
Most investors will require a mortgage to purchase rental real estate. This can alter your debt ratios which can impact whether or not you get the best mortgage or loan rates. To mitigate this risk, keep track of your credit score (you can review this on credit agency sites, such as Equifax or Transunion), pay all bills on time, and talk to an advisor before applying for new credit or renewing a current loan.
Risk #2: Spending on costly repairs and maintenance
As mentioned, most new investors will be seeking a rental property that is cash-flow positive. An investor needs to budget for a contingency fund (money used to pay for costly repairs and maintenance). If the anticipated monthly rent covers all monthly expenses, including a repair fund, then the property is cash-flow positive, which is fundamental for a good investment.
Risk #3: Dealing with bad tenants
It’s important to carefully screen tenants and create a detailed lease, preferably with the help of a professional property manager. Become familiar with local laws that apply to landlords and tenants. Also, consider adding insurance coverage to protect yourself from damage like vandalism.
Risk #4: Getting hit with a lawsuit
Liability is a massive downside to real estate property investments. As the landlord, you are open to medical and legal suits should a person be injured on your property. The easiest way to mitigate this risk is to purchase adequate insurance. Increased liability coverage—the portion of the insurance policy that covers medical and legal bills—is relatively cheap, given the potential damage a lawsuit can have on your personal finances.
Lack of requiring tenant insurance is one of the biggest mistakes we see in self-managed rentals. Do not minimize the importance of confirming your tenants has adequate insurance.
Risk #5: Potentially losing your investment
Another risk is the potential to lose everything should a catastrophic event severely damage or destroy the property. A fire, overland flooding or even hail can result in critical and expensive damage to the property.
Virtually all insurance policies will cover a catastrophic loss of a building, but as a real estate investor you must also consider the loss of income due to damage or destruction. A comprehensive rental policy will provide a landlord with income to replace lost rent at fair market value.
Bottom line: Calgarians can still confidently invest in real estate
Even with persistent headlines of uncertainty, Calgary real estate is still a viable way to build and grow your investment portfolio. Current trends in mortgage rates and the demand in specific rental property types can be the path to your personal wealth.
Source - Westhawk Peoperty Management Jan 2021