Over the past few decades, the average annual rate of return for Canadian real estate investments has been around seven to 10 per cent for residential properties and eight to 12 per cent for commercial properties.

And what’s more, the CREA HPI (Home Price Index), which tracks prices in 60 areas (in nine provinces and 51 cities or residential areas), shows that over the past 10 years:

• There is no area tracked where the HPI has declined in the last decade.
• The lowest of the 51 areas tracked increased by 5.2 per cent
• The highest of the 51 areas tracked increased by 220.4 per cent
• 35 of the 51 areas tracked saw an increase of 100 per cent or more
• The average of the 51 areas tracked is a 109.1-per-cent increase

Because this sort of rapid appreciation isn’t the norm, it shouldn’t be the only reason to invest in real estate, and that’s where rental income comes into play.

Rental Income

Rental income, the other important component of ROI, can provide a steady income stream to property investors. Typically, rental yield, or annual net rental income expressed as a percentage of the property’s value, ranges between three and five per cent for residential properties.

Combining The Annual Return from Capital Appreciation and Rental Income

Over the past decade, the combined annual return from capital appreciation and rental income has ranged from eight to 10 per cent. Again, this is simply an average, and individual returns can vary widely, as illustrated in the stats above,

Are Real Estate Investments Safe?

As long as you’ve done your research and buy property at the right price in an area where market data gives you confidence that the value will rise, real estate is theoretically a safe and lucrative investment.

In fact, real estate tends to experience less volatility when compared to stocks and bonds. With real estate, you can minimize risk by holding on to your property longer, should there be a drop from the price you paid and continue to build equity as you wait for prices to rebound. When you’ve built enough equity, you can leverage it to qualify for HELOCs and home equity loans, which may allow you to renovate or invest in more property.

Real estate is generally considered to be a safe investment because:

• It will almost always increase in value over time
• It has a high tangible asset value
• It adds diversity and helps reduce risk in your overall investment portfolio
• It comes with tax benefits

Steps to Help You Get Started Investing

Property investment takes planning and budgeting. Here are some steps to help you get started:

Clear Your Debts

Start paying down your debt as soon as possible to establish a strong credit rating. This step is also crucial as the less debt you carry, the easier it is to qualify for a mortgage.

Start Saving

As your debt is paid down, start putting money aside for the down payment on your first property. Make this a habit, and the next thing you know, you‘ll be ready to purchase your first residential or commercial property.

Do Your Research

Important things to research and explore include real estate investment tactics and timing, how to evaluate market trends and how to find up-and-coming neighbourhoods in your city.

Find a Trusted Agent

Work with a trusted agent to find the best properties with the best growth potential.

Find Your First Purchase

If you don’t already own your own home, you’ll need to save enough for your down payment and scope out your first potential purchase. What you want is a small, affordable house in an up-and-coming neighbourhood to help ensure you can sell it for more later. It’s best to put down at least a 20-per-cent down payment, as not only does your down payment directly affect the mortgage amount you borrow and the mortgage terms you get, but it also impacts what you’ll pay in interest over the life of your mortgage. Additionally, you won’t need to buy mortgage insurance. It’s also a good idea to only purchase a home with mortgage payments less than your current rent.

Save Again

Continue to save so that you can look for your next property. You’ll want to make this one a space you can rent to a tenant, so make sure you are buying in an area that will provide you with enough rent to fully cover your mortgage payments plus all applicable taxes and home insurance. Don’t overlook fixer-uppers that you can upgrade with minimal investment to get more rent. Ideally, you will not just break even but also accumulate a few hundred dollars per month to put toward your next real estate purchase. This money will also come in handy to cover maintenance costs.

Pay Down Your Mortgages

Your goal should always be to pay down your mortgage as soon as possible. If you pay off your mortgage or see a potential gain in selling your home, that’s how you begin to grow your real estate portfolio.

Is Home Ownership a Good Investment?

For the rookie real estate investor, purchasing a home represents the best of both worlds. As a rental property, it can provide additional income while offering an investment that will also appreciate over time.

You can choose from two types of rental opportunities:

• Single-family: You rent out the entire house or condo to one tenant.
• Multi-family: You rent separate units to separate tenants on each floor.

Many factors will affect how much you can make from each type of rental investment. Here is a comparison between the two:

Single-family homes

Advantages:

• Typically appreciate faster
• Easier to sell, making them more liquid
• Just one tenant to find and deal with
• No need to worry about complaints and issues among tenants
• Easier to collect bills and set up utility payments
• Easier to finance

Disadvantages:

• In most cases, there will be less cash flow generated than with a multi-family home
• Can be riskier if you end up with a bad tenant who does not pay rent or skips out
• Harder to find a good tenant as you have to charge quite a bit for rent
• No economies of scale if you want to hire a property manager

Multi-Family Homes

Advantages:

• Better cash flow with more units
• Lower unit price makes it easier to find tenants
• If one tenant is a dud or moves, you still have the cash flow to help cover your expenses
• Economies of scale
• Less expensive to manage on a per-unit basis

Disadvantages:

• Higher maintenance costs due to more people, more appliances to repair, more tenant turnover, and so on
• Takes more of your time as there are more tenants to worry about, collect rent from
• Slower appreciation in value
• Fewer buyers when you want to sell
• More potential tenant complaints about things such as noise, messiness, smells and more
• More challenging to find financing

Is Real Estate a Good Investment? You Asked, We Answered

Real estate investment lets people grow their net worth by amassing more and more properties. It’s generally a good investment in the long term due to appreciation and the potential for steady rental income to cover the mortgage, maintenance costs, and other costs. As you pay down your mortgage, you build equity, which can be leveraged to help you land a HELOC or home equity loan to finance renovations that will drive your home value higher or help finance your next property.

Since the real estate market is substantially less volatile than the stock market, investing in real estate is considered less risky than investing in stocks and bonds, making real estate a safer investment than many other options. As well, by adding real estate holdings to your overall investment portfolio, you add diversification that can help when other investments experience pullbacks.

Ready to start on the road to real estate investing? Connect with a REMAX agent and see the difference that adding an experienced real estate professional to your investing team can make.