Skip to table of contents Skip to content
GetSmarterAboutMoney.ca
Ask us an investing question
Share on Facebook Share on Twitter
Feature story

Investing
in Real
Estate

tall buildings in city
tall building

Feature Story: Investing in Real Estate

People have long used real estate as a way to invest for the future. Alongside other investments, investors have looked to properties like houses, apartment units, commercial properties and other types of real estate as a way of expanding their portfolios, earning income and planning ahead for retirement or sending a child to university. A recent study even showed that nearly half of pre-retired homeowners in the province are relying on the value of their home increasing to fund their retirement.

Some people consider the home that they live in to be an investment, which may gain value over time if housing prices increase. Other people may invest in real estate by purchasing property to lease to another person or business with a plan to earn income through the rental payments that the person or business provides. This is known as investing in ‘real property’ and is one of the most straightforward ways to generate an income through real estate.

Investing in real property is a very hands-on way of investing compared to purchasing traditional investment products, usually at a higher cost and demanding more time to manage. A property owner is responsible for handling paperwork, finding a tenant and making repairs, as well as covering all the costs that come with owning and maintaining the property, including any mortgages, taxes and utilities.

Video: Why are people investing in real estate?

Investing in real property is a very hands-on way of investing in real estate, usually at a higher cost and demanding more time to manage.

Because of the time, cost and risks that come with owning a property as an investment, you may instead choose to invest in real estate through funds, trusts and other investment products that provide exposure to the real estate market without being required to manage and maintain properties on your own. Purchasing these products, such as a share of a publicly-traded real estate company, means you are investing in the real estate market without maintaining any properties yourself.

Why are people investing in real estate?

In recent years, Canada’s long-running low interest rate environment has bolstered the popularity of real estate investing as people search for alternative investments that promise greater returns than they might otherwise be able to achieve through conventional investments like stocks and bonds.

Real estate investments can offer a steady flow of income over time. Rent can provide a fixed amount of income that’s agreed upon in advance and paid on a regular basis.

Video: What do real estate investment products look like?

Real estate investments can also play a helpful role in diversifying an investment portfolio. Adding real estate investments to a portfolio of diversified assets can help manage its overall risk, helping investors reduce the risk of their portfolios without sacrificing potential returns.

These factors can make real estate investments a useful addition to a well-diversified portfolio, but as with any investment, there are a number of risks and uncertainties that come with real estate that should be carefully considered. Different types of real estate investment products come with their own unique sets of features and risks, and it is important to understand how they work before choosing to invest.

Skip table of contents review Review table of contents
Investment product

Real
estate
investment
trusts

construction crane
tall building being developed

Investment product: Real estate investment trusts

REITs typically own large-scale properties like office buildings, shopping malls, hotels, warehouses and apartments.

Real estate investment trusts, or “REITs,” are companies that own real estate. REITs typically own large-scale properties like office buildings, shopping malls, hotels, warehouses and apartments. Unlike other real estate companies, REITs typically do not develop real estate properties to resell, but rather purchase properties to own and often operate.

Investing in a REIT means you are eligible to receive income through payouts that the trust receives from the properties that it owns. You can choose to invest in either public or private REITs:

Public REITs are listed on exchanges like the Toronto Stock Exchange, which makes buying and selling shares in a public REIT similar to purchasing shares in any other publicly-traded company, where the REIT’s share value can easily be determined by the price posted on the exchange. You can also learn more about the risks and fees associated with a public REIT by reviewing its prospectus.

Private REITs, on the other hand, are not listed on an exchange, and are instead sold in the exempt market. This makes them generally riskier investments than public REITs. As an investor, you must meet certain eligibility requirements before you can invest in a private REIT.

Like any other investment, both public and private REITs have risks that could affect an investment. However, since private REITs are sold in the exempt market, their levels of risk are higher as units in a private REIT are more difficult to value and trade.

warehouse building

Some common risks of investing in public REITs

Rental risk

Since REITs earn profits through the rents they collect on the properties they own, they are dependent upon tenants occupying their properties and paying rents. If a REIT owns a building that remains vacant for an extended period of time, the REIT’s profitability can be affected and, in turn, reduce the income paid out to investors.

Interest rate changes

REITs typically do not perform well when interest rates rise, as demand for REITs can decline and reduce the value of any shares in a REIT that you may hold, meaning you may have to hold onto your investment for longer than planned.

Some common risks of investing in private REITs

Lack of liquidity

Since private REITs are not publicly-traded, they may be difficult to value and cannot easily be resold. You may have to hold onto your investment for longer than you might have planned.

Lack of transparency

Since private REITs are not subject to the same disclosure obligations as public REITs, there is less information available on how the REIT is performing, which may make it more difficult for you to determine how your investment is doing.

Decline in investment value

The payouts you receive and the value of your investment is affected by the value of the properties that the private REIT has invested in and the income they provide. Deteriorating conditions of the properties, higher vacancy rates or tenants that do not make their rent payments can negatively affect your payouts or the value of your investment.

High fees

Private REITs sometimes pay higher management and other fees that can reduce its payouts and leave it with less money to maintain existing properties or invest in new ones.

Personal liability

You could be held personally liable for paying the obligations of a private REIT if the REIT does not have the funds to cover its costs. This is known as a “capital call.”

Skip table of contents review Review table of contents
Investment product

Real estate
limited
partnerships

Building, at least two stories tall.
Corner of building with eavestrough

Investment product: Real estate limited partnerships

LPs are commonly used to develop a property or manage properties that have already been built.

Real estate limited partnerships, or “LPs,” are commonly used to develop a property or manage properties that have already been built.

Real estate LPs are managed by a general partner that oversees development of a property. The general partner may use money from investors to buy land and develop it or to resell it at a higher price, giving investors the potential for growth if the land or development project goes up in value.

As an investor, you can buy units in real estate LPs. Most are private, meaning that their units are not traded on an exchange and are difficult to value and resell.

wide, 5-story building

Some common risks of investing in real estate LPs

Lack of liquidity

Real estate LPs that develop property typically require long-term investments that may be held for the entire duration of the project, which can run into construction delays and cost overruns that significantly extend the project timeline. You may not be able to resell your investment when you want, if at all.

No guarantee

Since the real estate market can rise and fall, and development costs can go over budget, there is no guarantee that a project you invest in will be sold at a profit.

Operational risks

The success of a real estate LP is entirely dependent on the management abilities of the general partners that are operating the partnership. As an investor, your role is passive and limited to the investment you have made, with no active role or responsibilities in the business of the partnership.

The real estate market can rise and fall, and development costs can go over budget.

Lack of diversification

Some real estate LPs develops one project at a time. If the project is never completed or sold, you could lose some or all of your investment.

Government approvals and market value

Some real estate LPs may not have secured all of the required government permits and zoning approvals needed to develop the land they own. Delays or denials for permits and approvals can significantly delay a project and impact the value of your investment.

Risk of capital call

If a project goes over budget, you could be obligated to invest more money to cover the extra costs.

Skip table of contents review Review table of contents
Investment product

Mortgage
investment
entities

suburb house
suburb house
suburb house

Investment product: Mortgage investment entities

MIE portfolios can include residential mortages, commercial mortgages and land mortgages.

Mortgage investment entities, or “MIEs,” are mortgage-financing businesses that pool money from investors to lend to people who may not be able to obtain a mortgage from traditional lenders like banks or credit unions.

MIEs provide loans to borrowers using money that’s been pooled from investors. These loans form the portfolio of an MIE and can include residential mortgages (such as single family houses, townhouses and condominiums), commercial mortgages (such as office buildings, warehouses and retail properties) and land mortgages.

MIEs pool money from investors to lend to people who may not be able to obtain a mortgage from banks or credit unions.

MIEs earn income from the mortgage interest, financing fees, mortgage renewals, cancellation penalties and other fees that they charge to borrowers.

As an investor, you purchase a security issued by the MIE, typically in the form of shares, limited partnership units, or trust units. These securities get their value from the value of the underlying pool of mortgages that are often secured by the real estate properties. You are eligible to receive income from the revenue earned by the MIE through its portfolio of mortgages.

Most MIEs are private and do not have their securities listed on an exchange, making them difficult to trade and value.

house

Some common risks of investing in MIEs

Lack of liquidity

Since many MIEs are private and not publicly-traded, they may be difficult to value and cannot easily be resold. You may have to hold onto your investment for longer than you might have planned.

No guarantee

Some MIEs claim to offer high annual yields and promote investments that are ‘secured by real property.’ Secured does not mean guaranteed, and while a mortgage may be backed directly by the real estate, your investment is not secured and you have no rights to the property that secures the mortgage. If a borrower is unable to make payments on a mortgage, this can affect the ability of the MIE to maintain payments to investors and will impact the value of your investment. There are also many factors that can impact the success of and returns from an MIE; past performance is not a prediction of future returns on your investment.

High risk loans

MIEs typically provide mortgages that are higher risk than mortgages made by banks or credit unions. If too many borrowers fail to make their mortgage payments, the value of your investment can decrease and the MIE may not be able to provide you with any income.

MIEs typically provide mortgages that are higher risk than mortgages made by banks or credit unions.

Decline in investment value

Borrowers may default on their mortgages or repay them sooner than expected, either of which can affect the value of your investment or the amount of income that gets paid out to you.

Low priority of rights

MIE mortgages can be a borrower’s second or third mortgage, which are typically riskier. If a borrower fails to make mortgage payments and the property is liquidated, the lender that provided the first mortgage will be first in line to receive its money back. An MIE that provided a second mortgage will only receive its money back if and when the first mortgage is fully paid off.

Skip table of contents review Review table of contents
Investment product

Syndicated
mortgages

large and tall building

Investment product: Syndicated mortgages

Some syndicated mortgages are used to fund large-scale real estate development projects, such as high-rise condo buildings.

Syndicated mortgages are mortgages that are provided by two or more investors that have directly invested in a single mortgage for a property.

Unlike an investment in an MIE, a syndicated mortgage investment applies to single mortgage rather than a portfolio of mortgages. Some syndicated mortgages are used to fund large-scale real estate development projects, such as high-rise condo buildings.

In Ontario, only mortgage brokers and agents licensed with the Financial Services Regulatory Authority of Ontario (FSRA) can engage in syndicated mortgage transactions on behalf of a brokerage, and only licensed mortgage brokers (not agents) can sign the required investor/lender disclosure statement forms. You can check that the individual or business is licensed with FSRA on FSRA’s website.

FSRA considers syndicated mortgage investments to be high risk and has warned consumers to be wary of advertisements promoting high returns or ‘fully secured’ investments. If you have a question or concern related to a syndicated mortgage investment, contact FSRA.

tall building

Some common risks of investing in syndicated mortgage investments

No guaranteed high return

Although some syndicated mortgage investments may promise ‘guaranteed’ high returns, such claims are inherently false and are prohibited by law. All investments carry some amount of risk, and the higher the potential rate of return, the higher the risk of the investment.

‘Secured’ does not mean guaranteed

Some syndicated mortgages are advertised as ‘safe’ or ‘fully secured.’ While it is true that your investment will be used to create a mortgage that is registered and secured directly with a piece of land or building, if something goes wrong with the project – and the value of the investment is limited to the value of the land – you may rank behind other lenders and may not receive any or all of your money back. This is because the value of the land may be only enough to pay any prior-ranking lenders.

If something goes wrong with the project you may not get your money back.

A lineup for repayment

As a syndicated mortgage investor, you are often second (or further) in line to be paid, behind other lenders that have already provided loans for the project. If the project fails, there may not be any money left over to pay you.

Interest payment risks

A syndicated mortgage borrower may not have any sources of income to support the mortgage’s interest payments. As an investor, you are entirely dependent on the borrower finding additional financing or maintaining a reserve to pay interest.

No investor protection insurance

Syndicated mortgages are not insured by the Government of Ontario or any other investor protection fund, meaning there is no way to guarantee you will get your money back.

Early withdrawals

If you want to withdraw your money before the end of the term, a new investor may be required to take your place, and there is no assurance that there will be any demand for the resale or transfer of the mortgage.

Skip table of contents review Review table of contents

Making decisions about your money

Like all investments, investing in real estate can offer a range of benefits for your portfolio, but there is no guarantee that a real estate investment will earn you any income or profit.

Real estate is just one of many industries or asset class in which you can invest. The more you invest in real estate over other industries (such as financial services, energy, telecommunications, or health care) the more you become exposed to the risks and uncertainties of the real estate market that can end up reducing your portfolio’s returns.

There is no guarantee that a real estate investment will earn you any income or profit.

You can mitigate some of the risk to your portfolio by diversifying your investments and choosing a variety of different industries and asset classes. By holding a diversified portfolio with investments in multiple industries and across different asset classes, it is less likely that all of your investments will perform poorly at the same time.

Video: What to keep in mind before investing

If you are not sure how a real estate investment would fit into your portfolio, it is important to speak with an advisor who can assess your risk tolerance and recommend products that can help you meet your goals.

An advisor will be able to answer any questions you might have about investment products, including real estate assets, and explain the risks involved with different investments. A registered financial advisor can help you determine the investments that are right for you based on your risk tolerance, financial goals and personal financial circumstances. They will also provide you with regular account statements and meet with you to review your progress and make adjustments to your portfolio as needed.

Anyone selling investments or offering investment advice must be registered with a securities regulator, unless they have an exemption. You can check registration to find out if a person or company is registered and in which category.

Real estate investments, like any other investments, provide no guarantees that you will make any income or profit. Before you invest, make sure you understand the risks and the potential impact that any investment might have on your overall financial goals.

Learn more before you invest

To get more information about investing for your future, visit GetSmarterAboutMoney.ca.

GetSmarterAboutMoney.ca is the Ontario Securities Commission’s award-winning investor education website that provides unbiased and independent tools to help you make better financial decisions.

You’ll find resources to help you work with an advisor, monitor the performance of your investments and diversify your portfolio.

You can also use the suite of calculators and tools to help you find out how your investment may grow over time, determine your net worth, pay off debt and more.

Back to top
city with various types of developments