Your Ultimate Guide to Alternative Real Estate Investments

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By Brian Pulis

The data clearly show that tangible real estate investments appreciate at a far greater rate than investments within the stock market. But investors must take a closer look at the real estate investment marketplace to analyze the various options available to them in the Private Investment Market. However, it’s important to remember that the rest estate market isn’t for everyone but there are still opportunities to invest with Binck Ervaringen.

Private Investments are largely unheard of among the general public. In part, this lack of knowledge is due to their limited promotion as well as the regulatory rules created by the provincial securities regulators in each province. Ontario, for example, has strict qualifying rules in place and therefore only sees approximately 5% of investors invest in this market. Many opt to go for a 1031 exchange brokerage option instead

However, in British Columbia, regulators have allowed access by a larger segment of the investor population. Recent pressure by the federal government to see regulations standardized has resulted in the provinces (mainly Ontario) considering some eagerly anticipated relaxation of the investor qualification rules in the near future. If these relaxations go ahead, many more people may find they are able to make real estate investments. However, this also opens many people up to fraud, especially if they are new to the industry. New investors, therefore, may find that they require the services of a brokerage fraud lawyer to get them out of financial trouble. Investing can be a lucrative pursuit, but you must also be careful with where you put your money.

As real estate investors, our success is heavily dependent on the location where we choose to invest and how we manage our properties. This is where private investment opportunities are so valuable in the real estate investment marketplace. While many individual investors simply don t have the investment knowledge on specific geographic locations and management processes, they can work with those that do have this understanding to achieve lasting returns.

Private Investments provide investors with an opportunity to diversify their portfolio and partner (invest) with companies that share their values and vision to leverage their capacity in different asset classes as well as locations.

Private real estate investments provide investors with opportunities to invest in proven locations, with proven management. By choosing a private real estate investment where the management team shares the same vision and values, investors can participate in- and benefit from- locations and asset classes without having to be either market location experts, or property management experts themselves.

The challenge for all investors is in deciding which of those opportunities best fits your specific risk tolerance, return objectives, time horizon and investment capacity. There are multiple investment instruments that allow Canadians to build on the strength of their portfolios by making real estate a key element in their asset mix. Let s take a look at the available private investment choices for the proactive investor:

MICs

MICs (Mortgage Investment Corporations) allow individual investors to anonymously pool their resources and invest that pool into a diversified range of residential and commercial real estate loans. They re a relatively new type of investment and offer a way of investing with a large group of like-minded investors through a MIC manager.

Advantages:

  • allows individuals to invest in private mortgages
  • hands-off investment controlled by a management team
  • Investment timelines are fixed, sometimes with short or flexible timeframes
  • Risk is limited to the initial investment
  • Returns are typically determined up-front so investors know what to expect

Disadvantages:

  • MICs are able to invest in subprime mortgages, potentially putting investment money at risk
  • Most MICs are limited to a fixed rate of return, therefore not participating in potential equity growth
  • Borrower(s) can default, thereby exposing investors to uncollectable debts in high ratio mortgages
  • Can be used to fund soft (unrecoverable) costs in development projects therefore limiting security attached to investment
  • Should the MIC have to inject development costs into an investment, they may lose the tax advantages given under the Tax Act

Limited Partnerships

A Limited Partnership is a legal entity in which a group of investors (Limited Partners) pool their investment money and buys multiple properties together. LPs are available for many industries and sectors (real estate, construction, oil & gas, film production, etc.).

This can be considered similar to timeshare, or vacation ownership. This concept exists for people trying to purchase a holiday home, but find that the total costs are falling out of their budget. In such a situation, you would be able to purchase the property along with other people also interested in the same. While this option might sound very appealing, it can come with a downside as well. You would not have complete ownership of the property, which means that you’d have to schedule your vacation based on the schedule of the other owners, and that can be a hassle. Along with this and the high maintenance charges, people might want to get out of vacation village timeshare, and look into other investment options instead.

In Limited Partnership, typically the investors don’t know each other, and are not involved in the day-to-day management of the real estate properties. LPs are especially ideal for investors looking to diversify into cities or property types where they are limited in experience or time to pursue on their own.

Advantages:

  • Investment in the majority of LPs is secured against hard assets. This ensures investment stability and provides investors a level of predictability
  • They can be structured to match investor s specific interest; US investing, multifamily etc.
  • Many LPs are structured to allow investment via registered plans (RRSP, TFSA, RRIF, LIRA, RESP, etc.)
  • They are hands-free investments. All the operational responsibility is given to the manager
  • Management compensation is usually tied to performance
  • Risk is limited to the initial investment
  • They often offer a tax-efficient business structure
  • They allow investors to place their money in real estate without incurring any liability beyond their initial investment. As a limited partner, investors will share in the cash flow distributions as well as the asset appreciation

Disadvantages:

  • LPs offer limited liquidity
  • Investors retain little control over their investment
  • The investment is often limited to a specific category
  • Returns are often not fixed so it can be difficult to manage expectations

REITs

Real Estate Investment Trusts (REITs) can be private or public. Both private REITs and public REITs have advantages and disadvantages. It s imperative that investors review each of these points in detail as they investigate the potential for portfolio growth through REIT investments.

Advantages of Private REITs:

  • The price of an investment unit is based on the value of properties held in the portfolio, therefore they are relatively stable and predictable
  • They can be a hands-free investment
  • Risk is limited to the initial investment

Disadvantages of Private REITs:

  • There is less market regulation
  • They are relatively illiquid compared to other products
  • They typically include large-scale investment properties, thereby limiting the flexibility to enter certain markets and/or niche deals with high return opportunities.

Public REIT Advantages:

  • They are closely regulated by governmental agencies
  • They can be bought by anyone
  • They are highly liquid

Public REIT Disadvantages:

  • They may have a high level of price volatility due to ties to the stock market
  • The public offering involves additional costs, which reduces returns
  • Less opportunity for individual tax management

Whether investors are selecting real estate LPs, REITS or MICs, there is great potential for solid returns over the long-term. There s no shortage of data showing the Canadian real estate market has consistently delivered great value to investors.

By researching the industry closely, proactive real estate investors will find the requisite combination to put their retirement strategies into action and ensure their capital is working toward their future needs.

Brian Pulis has been investing in real estate since 2002 and REIN member since 2003. Brian is the Co-Founder of Pulis Investment Group, which offers investors a Hands-Free, RRSP eligible opportunity to invest in apartment buildings.

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