Financial Friday #99: How to Invest in Housing Without a Mortgage!
Alternatives to Buying in Today's Housing Market
Unless something drastic happens to the housing market, the reality of owning a home is currently out of reach in many parts of Canada. It’s a bitter pill to swallow mentally, but there are options to get in on the financial benefits of the real estate market without the bidding wars and jumbo-sized mortgage payments.
Real Estate Investment Trusts (REITS).
A REIT is a company that owns and/or manages a portfolio of properties that could include commercial buildings, apartments, shopping centers, residential homes, offices, and other types of real estate. The diversity and mix of properties vary from one REIT to the next and there are currently 30+ REITS trading on the TSX. A REIT can be held in your RRSP or TFSA.
REITS are unlike stocks in that investors are usually paid a monthly distribution (dividend) based on the performance of the properties. There is also the chance for gains through appreciation of the share price. REITs are a convenient option to add more diversity to your stock portfolio. Unlike owning a property, REITs are completely liquid and can be easily bought and sold — you could start investing with a few shares purchased through an online brokerage.
The disadvantages are that you may not be able to find a REIT with a mix of properties you like, and your investment is only going to be as good as the REIT management. There are also Exchange-Traded Funds (ETFs) that hold a pool of REITs to help diversify exposure and lower the risk compared to owning an individual REIT.
Fractional Property Ownership
Fractional property ownership or crowd-funded ownership is a relatively new concept where investors join together to collectively own a particular real estate asset — it could be an apartment building, commercial property, or even a residential home. It is different from a REIT in that you invest and own a share of a specific asset.
The property is sold in individual units and there are terms and conditions specific to each offer. Investors gain from sharing of rental revenues and the eventual sale of the property. You could get started for a $1, but the maximum in any one property may be capped at a few thousand dollars, so you may have to find several opportunities that appeal to you if you have more than that to invest.
The disadvantage is that individual real estate assets can fluctuate greatly in price and you can only sell and cash out our shares after the date prescribed in the ownership offer – they are not liquid.
These differ from fractional ownership in that the investors are completely responsible for managing all aspects related to financing, buying, maintenance, and disposal of the asset. There are many components to a co-ownership agreement and there are legal firms which specialize in creating these types of documents.
Co-ownership offers complete freedom in how much each investor owns, who lives on the property, improvements to the property, cost sharing of expenses, selling the property, the decision-making process, and many other aspects.
The advantage is that you can get into a market you could not afford on your own, and that you and the other investors are in complete control.
The disadvantage is your co-ownership agreement may be severely tested if there is “incongruity” among the investor group's wishes — you need to choose your partners wisely and have a bomb-proof agreement.
We don’t have a crystal ball on whether or not purchasing real estate in today’s market will turn out to be a profitable investment down the road. A home is a lot more than an investment for most people and it’s a sad fact that home ownership has become so difficult over the past few years. The above options allow you to get in on some of the potential financial benefits of owning real estate (home prices could crash as well!) without the huge resources needed to purchase outright
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