The primary goal of investing is to make gains and earn returns. Real estate investments involve purchasing properties such as land or building, or providing funding for property buyers. It is a great form of alternative investment.

Investors who buy real estate properties look to earn income through capital gains or rental income. Real estate investors also provide mortgage loans in return for interest payments.

Investing in real estate goes way beyond purchasing a residential home to live in. It also involves purchasing rental homes, commercial properties, and even industrial properties to earn returns.

In the Canadian real estate space, surging housing prices have resulted in the value of residential homes skyrocketing. Consequently, investors are looking to gain from the hot property market.

If you have the line of thought that real estate investing is only available to the wealthy, that is not the case in current times. Real estate investing has become more accessible to retail investors — the average everyday Canadian with a regular source of income. How can average Canadian residents access real estate investing despite rising house prices? The answer is through indirect real estate investing.

Keep reading to learn more about direct and indirect investing in the real estate market as an alternative source of investment income.

Direct Real Estate Investing

With direct real estate investing, you generally purchase and own properties through a cash sale or a mortgage. Direct real estate investments require substantial capital and involve active property management.

Most real estate investors who opt for direct real estate investing engage in long-term rentals—they rent their properties to tenants and earn rental income.

Some investors also use their properties for short-term rentals, such as Airbnb rentals. Investors willing to take up more work and look forward to quick gains buy and flip properties.

If you invest directly in real estate properties, you can earn investment income through returns from rental income and capital gains from property value appreciation.

Indirect Real Estate Investing

Think of indirect real estate investing as partaking in the lucrative real estate market without owning actual property.

Indirect real estate investing allows investors to own fractional units in real estate properties that would not have been ordinarily accessible. The possibilities with indirect real estate investing are endless.

Here are a few ways to earn returns from the real estate market if you do not want to get into the hassles of managing properties.

Real Estate Investment Trusts (REITs)

Real estate investment trusts are companies that purchase real estate properties to earn income and distribute them to investors.

You can buy into real estate investment trusts through a public or private market. Public REITs are traded on stock exchanges. On the other hand, private REITs are not listed on public stock exchanges, and you can purchase shares directly from private REIT companies.

As an investor, you can also buy REIT Exchange-Traded Funds (ETFs) or purchase them in a mutual fund.

Real Estate Funds

Real estate funds are private investment opportunities in the real estate market. Generally, real estate investors cannot buy into real estate funds through a public market like the stock exchange market.

Real estate funds operate through various methods. Regardless of what type of fund you invest in, the basics are usually the same. Real estate funds are typically managed by real estate experts who act as syndicators or operators. Real estate syndicators pull funds from investors and provide funds to developers; this may be in the form of a loan/mortgage or as equity to purchase properties on behalf of the investors.

Mortgage Funds are designed to provide investors with opportunities to invest in mortgages secured by high quality commercial real estate for example new home developments.

Real estate syndicators and operators purchase high-end properties and manage the day-to-day activities of the fund. They are referred to as the general partners (GP) in the fund agreement, while investors are called the limited partners (LP).

As an investor, all you need to do is invest your money and receive periodic returns from rental income or capital gains from property sales.

Mortgage Investment Corporation (MICs)

Buying shares in a mortgage investment corporation is a private lending form of investing in the real estate market. MICs pull funds from investors and lend to borrowers for mortgages. As a result, investors receive returns from the mortgage interests that borrowers pay to the MICs.

MICs provide funding for various forms of real estate projects. At least 50 percent of a mortgage investment corporation’s real estate loans must be for residential property. The mortgage investment corporation manages risk management and provides alternative forms of mortgage lending in exchange for competitive interest rates.

MICs are considered non-bank mortgage lenders. As of 2021, non-bank mortgage lenders in Canada accounted for up to $350.5 billion in residential mortgage balances. As an investor, non-bank mortgage lenders such as MICs allow you to tap into the heated real estate market, earning interest that can be reinvested into the MIC portfolio.

Pros of Investing in Real Estate

• Investing in real estate allows you to diversify your investment portfolio. The real estate market is not correlated with traditional financial markets. Property prices do not fluctuate like stocks and bonds prices.
• As a property investor, you can earn returns through rental income, property appreciation, interest, and dividends from real estate funds.
• Indirect property investing gives you the benefits of investing in the real estate market without dealing with the troubles of maintenance and tenant issues.

Cons of Investing in Real Estate

• Investing directly in real estate requires capital. Some people do not have access to funding to purchase properties.
• You need market expertise to reap the benefits of investing in the real estate market.
•  Real estate investments are typically long-term in nature.
• Investments in private real estate assets are generally illiquid.

Summary

Real estate investing allows investors to diversify their investment portfolios. With an increasing demand for houses, home prices have surged over the past few years. This creates opportunities for Investors to receive periodic returns through capital gains, rental income, and interest through mortgage loans.

Like other investments, real estate investing has risks, and you need market expertise to manage your portfolio effectively.