Gone are the days when stocks and bonds were the only financial instruments available for retail investors in Canada. Today, investors can allocate their funds to multiple alternative investment vehicles, such as real estate, private equity, crowdfunding platforms, etc.
In this article, our primary focus will be geared toward real estate – the oldest form of alternative investment generally with high returns for investors over time.
Traditional Real Estate Investing
Owning your home is the most know method investing in real Estate; then buying and renting a secondary home or purchasing a secondary property like a cottage for vacation time
Interestingly, 66.5% of Canadians own a personal home, as per Stats Canada. However, a significant portion of the population still finds it difficult to finance their home purchase.
Therefore, it’s safe to say that home demand is high in Canada, meaning that lucrative prospects exist in the real estate investment market.
However, real estate investing can be divided into active or passive management.
Passive Vs. Active Real Estate Investment
Active real-estate investment is when the investor is involved with research, construction, maintenance, and finding tenants. You, as an investor, have to invest your time, money, and effort to keep your investment profitable if you wish to adopt the active investment strategy.
It’s more suitable for experienced investors who know the real estate market dynamics.
In contrast, passive real estate investment requires less effort and time from investors. Passive investing is investing your capital into various real estate entities, fund, corporation and several other investment options.
What are the Passive Real Estate Investment options?
There are plenty of promising ways to invest passively in real estate and maximize returns. Some of the popular ways include:
REITs
REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.
In Canada, the REIT market has grown tremendously, from five in 1996 to over 40 listed REITs trading on the Toronto Stock Exchange TSX.
As an investor, you provide funds to REITs, which collectively pool all the investors’ funds to acquire an underlying asset. REITs can be both private and public investments
Public REITs are traded on the Toronto Stock Exchange (TSX), while private REITs are exempt market investment vehicles. They are available for direct investing or Exempt Market dealers REITs’ are effected by rental dynamics.
The best part is that these REITs usually distribute 90% of the taxable income to the shareholders annually.
REITs historically have delivered competitive total returns, based on high, steady dividend income and long-term capital appreciation. Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns. These are the characteristics of real estate investment.
Mortgage Investment Companies (MIC)
A Mortgage Investment Corporation, (MIC) is an investment and lending company designed for mortgage lending in Canada. Owning shares in an MIC enables you to invest in a company which manages a diversified and secured pool of mortgages. MICs pool funds from strategic institutional and retail investors and lend them to borrowers who can’t obtain financing from traditional routes. Even though the borrowing rate advanced to borrowers is high, there’s also a tendency for higher yields, which can range between 8-14%.
However, these mortgages aren’t insured by Canada Mortgage and Housing Corporation CMHC. The income earned from MICs is distributed first and then taxed to shareholders. If you want to avoid high tax rates, you can hold MICs in tax-sheltered accounts.
Real Estate Funds
Real estate or mortgage funds are a form of mutual funds. A Mutual Fund Trust, or MFT, is a private structure that functions like a Limited Partnership (LP) whereby MFT units are issued to investors in accordance with investment terms offered by the MFT. Like a General Partner (GP), the Trustee invests the funds on behalf of the unitholders into real estate projects. These funds pool the investors’ money and invest in many types of Commercial and Residential Mortgages. These funds have large portfolios and are managed by experts. Note – this is the category that RealAlt Investment falls into.
Even though real-estate funds are longer-term investments you can get stable and larger returns in the form of monthly, quarterly or yearly distribution payments.
Syndicated Mortgages
Syndicated mortgages involve investing in a single mortgage instead of a vast portfolio of mortgages. A syndicated mortgage investment (SMI) is an arrangement in which more than one investor (i.e. lender) is involved in a loan or debt obligation secured by a mortgage.
Real-Estate Crowdfunding
It’s a pooling investment strategy similar to online platforms that allow users to invest in partial shares of a company’s stocks. In most cases, numerous users provide their funds to these platforms, which allocate them to various mortgage loans.
Real-estate crowdfunding is more transparent since the users have the privilege to choose specific assets for investments.
Real Estate vs. Equity Stocks Investment
Both investment vehicles have different natures. It’s better to have both in a portfolio, and the reason is simple. The risk-return characteristics can be negatively correlated with stock investments, which will reduce volatility, increase diversification, and enhance returns.
Additionally, real estate investments tend to be are more transparent than equity stocks
Whereas, alternative investments like real estate might not as liquid like stocks. While we have observed that listed REITs exist, the liquidity of a real estate investment is still low.
Overall, it’s better to keep both in your investment portfolio.
Passively Grow Your Wealth with Real-Estate Investments!
Passive real estate investment has options for the lower risk investor – REITs, your medium risk investor – MICs and your medium to higher risk investors – MFT. In Canada, Real Estate is a great place to invest. Like all investments do your research and ask questions before making a investment decision.
Frequently-Asked-Questions (FAQs)
How does passive Investment work?
In passive investment, your money works for you. You provide your funds to a investment manager who invests them in avenues that generate promising returns for you.
Is Real Estate a good passive Investment?
Yes. If you don’t want to be a landlord but earn passive income, passive real-estate investment is for you.
However, it’s recommended that you conduct due diligence and research the market before pooling your funds with a company.
How does Real Estate Compare with Investing in Stocks?
Real Estate and Stock Investment differ in terms of liquidity, performance, and risk. The performance of real estate investment depends upon your timeframe and various parameters. The Stock market and Real Estate investing tend to be inversely correlated.
While real estate might be less liquid than stocks; stocks tend to volatile. Nonetheless, diversification is the key to maximizing returns and low risks.
So, it’s recommended to maintain a balanced portfolio consisting of a mixture of stocks, real estate, private equity, and fixed-income securities.
References
- https://wealthawesome.com/real-estate-investing-in-canada/
- https://www.savvynewcanadians.com/alternative-investments/
- https://blog.reincanada.com/is-active-or-passive-real-estate-investing-right-for-you/
- https://www.reit.com/
- https://www.canadianrealestatemagazine.ca/expert-advice/how-to-passively-invest-in-real-estate-335055.aspx
- https://www.rocketmortgage.com/learn/passive-real-estate-investing#:~:text=What%20Is%20Passive%20Investing%3F,ownership%20and%20real%20estate%20funds.
- https://equitymultiple.com/blog/passive-real-estate-investing
- https://www.fool.com/investing/stock-market/market-sectors/real-estate-investing/passive-investing/
