Investing In Real Estate – Is It For You?
You've just heard another story about someone making a fortune on a real estate investment. Should you get into the market?
"Real estate investments are very popular today," says Chartered Accountant Jerry Cukier, a Partner with Soberman LLP in Toronto. "Growth in real estate has been faster than the growth of many other investments."
Those who invest in real estate tend to have more control over their investments. "You know the quality of the building, you know the surrounding market and what the demand is," Cukier explains. "If you plan your acquisition properly, real estate can be a key part of your overall investment portfolio and retirement planning strategy."
But investing in real estate is not for everyone. "You need to be willing to learn and do the necessary investigative work up front," says Cukier. "In most cases, it's not for people who are looking for a quick gain. You may have to be in it for the long haul. Your real estate investment is just one part of your total portfolio."
While investing in real estate can be financially rewarding, there are also downsides.
"There's always an expectation that property will go up in value, but it doesn't always happen," says Chartered Accountant Gail Weiler, a partner with Smith -Nixon LLP in Toronto. "If you have to sell suddenly and the market bottoms out, you can lose money. Sometimes you have to incur significant costs to get an investment property into rental condition. And there's always the risk of bad tenants who can do a great deal of damage to your property."
If you invest in the residential market, be prepared for midnight phone calls from tenants and for downturns in the market.
"Some people think they can take out a large mortgage, buy a property, rent it out and create a loss every year to shelter other income," adds Weiler. "But the Canada Revenue Agency has an expectation that there will be a profit at some point. If there is consistently no profit, the owner may not be able to claim those losses. Also keep in mind that you can't create rental losses by claiming capital cost allowance – also known as depreciation – to shelter other income."
Before investing in real estate, be prepared to undertake extensive background research on the property, the market and potential tenants. Legal work to check for any issues relating to the property is also wise. If you are buying a house as an investment, be sure to get a home inspection.
"In addition to legal, mortgage and appraisal fees, real estate investments may be subject to land transfer tax and the Goods and Services Tax (GST)," says Weiler. "Further, there are significant tax implications if you sell the property."
Borrowing money or teaming up with other investors to purchase real estate can be a good idea. "It spreads the risks and may permit you to buy a larger number of properties," says Cukier. "It permits you to diversify and own properties in different areas of a city or province."
But keep in mind that if you invest using other people's money and the market falls, you may end up owing more than your properties are worth.
If you are thinking about investing in real estate, be sure to consult a Chartered Accountant.
"A CA can supplement your research, help you with financing and advise on how to structure the ownership of the property," says Cukier.
Weiler adds that a CA can help determine the capital cost allowance on a property and help identify deductible expenses, such as insurance, mortgage interest, property management fees, condo fees, repairs and maintenance, and professional fees. "A CA can also help you design a system to keep the records you need to determine rental income and expenses for tax reporting," she says.
For more information contact a Chartered Accountant.
Brought to you by the Institute of Chartered Accountants of Ontario.