What People Should Know Before Making an Investment
Real estate remains an attractive investment here in Canada, but having all of the information at hand before making a move is essential. Using the services of a financial advisor may not be the best option because, as recent controversies have revealed, many Canadian advisors face sales pressures that force them to recommend investments that are not always in the best interests of their clients.
“For an investor who does want to allocate to real estate and not use an advisor, they have the option to buy a property and rent it out; purchase, renovate and resell; trade in real estate; or buy publicly traded REITs,” says George Lawton, CPA, CA, CEO, North American Home Finance Inc. “If they do want to get an advisor, they can buy a Canadian REIT index fund, mutual fund or syndicated mortgages through a professional or self-directed RSP account. With that account, they can also lend money out to other real estate owners just like the bank does.”
Although historically popular, the buy-to-rent strategy is proving increasingly challenging in the current market. Home values have risen sharply over the last 5 – 10 years, and it’s now gotten to the point where it’s difficult to make the numbers work. “The CMHC eliminated the high ratio financing option for residential properties for investors 4 – 5 years ago and it’s now difficult for investors to affordably buy residential properties and realize positive cash flows,” Lawton says. “People don’t want to buy a property and keep feeding it every month out of their own income stream.”
In order to get some positive real estate returns and good consistent income, more investors are accessing large developments and commercial property investments via publicly traded REITs. “The bigger REITs have strong balance sheets and provide income but, because of their maturity in the markets, the yields have come down,” Lawton says. “In the current environment, many individuals are uncomfortable with the volatility associated with publicly traded REITs. Uncertainty around market timing is making it difficult for people to feel they’ve made the right move at the right time.”
In theory, syndicated mortgages and limited partnerships are good options for people looking to access commercial real estate or development projects. But, because they tend to be offered by small, companies, as opposed to large publicly traded companies with large balance sheets, they’ve face many issues in recent times. “It can be like rolling the dice: it’s hard to know if an investment is good and if the company has the right strategy to deal with hurdles,” Lawton says. “Because these companies are smaller than large publicly traded REITs, they don’t have the liquidity and balance sheet to weather business cycles in the same way.”
Building returns in your portfolio
As the house prices in certain Canadian cities continue to rise, more people are being forced to – and are choosing to – live in more suburban settings. This shift creates a good opportunity for real estate investors and many are reaping the benefit investment vehicles that provide access to residential developments in suburban settings: Bonds.
Similar to other real estate bonds, RealProperty Bonds only invest in a project when all of the legal approvals are received and the financing is secured. However, unlike other bond-type instruments, real property bonds give investors the ability to choose between two varying profit streams. Investors also have the opportunity to buy a bond by putting down an initial $750 or $1,500 and then borrowing the rest. On a $20,000 bond, an investor could expect to achieve a return of $11,000 after putting down an initial $1,500.
“The investor can either choose a 50% return or a 100% return,” explains George Lawton, CPA, CA, CEO, North American Home Finance Inc. “The bond retuning 50% is a five-and-a-half-year investment and the 100% version has a seven-and-a-half-year term. The investor is able to decide how much profit they want to make based on which bond suits them best. And, unlike conventional bonds, the majority of this profit is earned as a capital gain which provides the investor better after-tax returns, which is really the thing that matters most at the end of the day.”
Lawton believes that, due to the way they’re structured, real property bonds eliminate the uncertainty that is part and parcel of most investment strategies. The investment is secured directly against the land by the trust company that holds the mortgage, providing the sort of peace of mind that every investor is searching for. “Unlike investing in a stock market, where a financial advisor will hope the investment will go up by a certain amount each year, RealProperty Bond investors pick how much profit they want,” Lawton says. “Based on the value of the property on day one, that profit is already covered. There is a lot more predictability to the return: it’s not a ‘what if’, it’s a contractual return that the bond holder is set to receive.”
RealProperty Bonds are sold by offering memorandum which means investors are not required to be accredited. They’re an affordable way for investors to enter the market, but they also play an important role in affordable creating homes. “We are focused on increasing the capital available for housing development,” Lawton says. “We care about housing and believe that all Canadians should have the opportunity to own; that’s our purpose.”
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