It’s no secret that the Canadian real-estate market has been on a tear. Real estate prices are up by 8.9% over the last 12 months. Newspapers are full of stories about homes selling for tens of thousands of dollars over asking and at least some of the middle class have gone back to that tedious habit of boasting about how much their house is worth. However, before you hand over a deposit on a shiny new condo that exists only as a gleam in a developer’s eye, consider some of the down-sides:
Tenants: An income property is only worthwhile if it is making income, and that means you have to rent it. In Ontario, the Residential Tenancies Act places a whole range of restrictions on what you can do as a landlord, including how much you can increase the rent and what you have to do when you want your tenant to leave.
Diversification: Your home probably represents, if not a majority, certainly a big chunk of your net worth. Buying another piece of real-estate in the same town increases your exposure to that market in the event that it takes a dive. Of course you could buy an income property well away from where you live, but that has problems as well (see Tenants above).
Transaction costs: Buying and selling real-estate is expensive. Between real-estate commissions, land transfer taxes, legal fees etc., the cost of selling your investment can easily be 7 – 10%.
Liquidity: The long bull market in Canadian real-estate has made people complacent about liquidity, but that can dry up very quickly if the market takes a dive, as people who owned property in the US in 2008/09 can attest.
Does this mean you should stay away from investing in the housing market? No! Instead, consider investing in Mortgage Investment Corporations. A Mortgage Investment Corporation gives you access to a diversified real-estate portfolio, whose owners, unlike tenants, are very motivated to make the payments on time and keep the property in good condition. The Cannect MIC has an average return since inception of over 8%, which compares well with the property market, and liquidity is good. Even in the worst case scenario (redeeming the investment after 18 months), the redemption fee is capped at 5%.