The Canadian real estate market has been growing at an unprecedented rate (particularly in the Toronto and Vancouver market), and investors are eager to jump on the bandwagon – but many don’t know where to start. The risks, benefits and returns associated with all the different types of real estate investments can vary greatly, making it difficult to choose where to put your money.
To help you figure out which option is best for you and your portfolio, we’ve assembled an overview on the most common types of real estate investments.
1. Public Real Estate Operating Company (REOC) or Real Estate Investment Trust (REIT):
Best suited for higher risk investors that are income-seeking
What is it?
A type of company or trust that invests in groups of professionally-managed commercial or residential properties. REOCs or REITs typically specialize in a single property type and are generally exposed to multiple geographic submarket..
By law, REITs must have a distribution payout ratio of greater than 90%. They can provide steady income and allow for capital appreciation.
- Can be easily bought or sold at per-share or unit price
- Low minimum investment requirements with ongoing income and capital gain potential
- REITs are structured to avoid double-taxation of regular corporate dividends
- Sensitive to changing interest rates and variations in the real estate market
- Some have higher risk, such as those focusing on hotels or have high tenant concentrations
- Stock markets can move quickly depending on company, industry and world events which can affect your investment value immediately
2. Mortgage Investment Corporation (MIC)
Best suited for long-term income-seeking investors
What is it?
A MIC is a company that allows multiple investors to pool their money to be lent out as mortgages on residential or commercial properties. Owning shares in a MIC allows investors to have a stake in a pool of diversified and secured mortgages.
MICs have the potential to yield solid returns, with dividends typically ranging from 5% to 7%.
- Must distribute 100% of their net income to investors each year
- Potential for high yield
- They are governed through the Income Tax Act, which imposes strict regulations and emphasizes transparency
- Rely heavily on the experience, judgement and competence of their managers
- Generally focus on specific markets and are highly affected by changes in those markets
- Although rare, failure to comply with the Income Tax Act could mean losing MIC status, leading to taxation of income before it is distributed which lowers returns to shareholders
3. Syndicated Mortgage
Best suited for high risk, high reward investors
What is it?
A syndicated mortgage is a loan from more than one investor to a borrower. They can be comprised of as few as two to more than one hundred individuals lending money to a developer in exchange for a fixed annual interest rate paid over a set number of years.
The expected rate of return on a syndicated mortgage is typically 8% or higher; however, this cannot be guaranteed. A high return will depend on the mortgage broker’s experience, expertise and due diligence. Because of the relatively high risk, this type of investment also has one of the highest return potentials compared to other real estate investing options.
- Potential for high returns
- The investor can decide which specific property/borrower they would like to invest in
- Syndicated mortgages are provincially regulated, ensuring that providers are licensed
- Each syndicated mortgage is unique, requiring extensive due diligence before investing and subject to minimum investment requirements
- Investments are illiquid therefore investors cannot take money out until the end of the term or contract
- If the project is delayed or has a setback, there may not be funds left to pay investors once higher-ranked costs are covered
4. Real Estate Limited Partnership (RELP)
Best suited for hands-off investors
What is it?
A RELP is an agreement between one General Partner and one or more Limited Partners. The General Partner assumes all decision-making responsibilities and liability in the investment, while the obligations of the Limited Partners are limited to their initial investment amount. This type of investment is typically used for shorter-term developments.
RELPs typically yield relatively high returns when compared to most stocks or other real estate investing options; however, this comes at a higher risk.
- High capital appreciation potential depending on strategy
- Can have shorter investment terms compared to other private real estate investment options
- Investors have no liability for principal debt
- High minimum investment requirements
- Investors must meet income and net worth requirements
- Does not offer interim cash distributions; investments are not usually redeemable before a pre-set “liquidity event”
5. Investment Property
Best suited for hands-on investors
What is it?
An investment property is a direct investment into a piece of real estate in the form of homeownership or owning a rental property. In the case of homeownership, the investment pays off once the property is sold. In the case of a rental property, the investment becomes profitable once the rental income has covered the full cost of the property.
Depending on the current real estate market, direct investment has the potential for very high returns. Usually a long-term investment, holding on to a property until its value increases significantly can be very profitable. Conversely, if the real estate market takes a hit, the loss can be just as great.
- Highest risk/reward profile of all types of real estate investing
- The return on investment can be significantly higher than all other types of investments
- Investor has full control of the asset(s)
- Requires significant amount of starting capital
- High operations costs related to property maintenance Requires in-depth knowledge of local real estate market and a sound understanding of broader economic fundamentals
Hi-Rise Capital’s Approach to Real Estate Investing
Hi-Rise Capital offers investors the opportunity to participate in high quality purpose-built real estate development projects specifically in the Greater Toronto Area (GTA), addressing a core and underserved need in the market. We focus on residential development projects that are unique, differentiated, and found in high demand locations, pursuing opportunities by undertaking a rigorous analysis of projects. Our investment approach combines broad macroeconomic fundamentals with specialized local market intelligence.
Our mission is to provide excellent real estate investment opportunities not otherwise available to smaller investors in the marketplace, with the objective of achieving above-average returns consistently and reliably.