The Complete Guide to Investing in Real Estate in Canada

Investing in real estate in Canada offers numerous opportunities for building wealth and securing your financial future.

Canadian real estate, much to the dismay of first time home buyers, has shown remarkable growth over the years, with cities like Toronto seeing average home prices skyrocket from $351,575 in 2000 to significantly higher levels today.

You can invest in Canadian real estate through various methods, most of which we’ll talk about in this article.

Each approach has its own advantages and considerations. Buying a home to live in not only provides shelter but can also appreciate in value over time. Rental properties can generate steady income streams while potentially increasing in worth.

For those seeking a more passive route, REITs allow you to invest in real estate without the responsibilities of property management.

Lets dig right into it.

How to invest in real estate in Canada

Outside of the types of properties, which we’ll go over below, the process of investing in real estate in Canada is very easy. One simply needs to:

Determine the budget you’re working within
Save up or acquire an appropriate amount of money for a down payment
With that budget and down payment in mind, head to a bank or mortgage broker and get pre-approved
Choose a location that fits within that budget and with homes in your pre-approved range
Hire a licensed real estate agent that is comfortable working in the location you’ve chosen
Research online listings and work together with your realtor to identify properties you’d like to view
Work with your real estate agent to draft up an offer on a property you’d like to purchase. Typically, there are two conditions set on most home offers: financing and home inspection.
If your offer is accepted, find a home inspector to look at the home. This typically comes out of your pocket, but is a must to avoid catastrophe
If the home inspection passes, finalize the financing through your bank or broker.
Hire a lawyer to handle your closing costs
Sign the paperwork and take the keys to the home on the closing date

The different types of real estate you can explore in Canada

Residential homes

Purchasing a residential home is probably the most common entry point for real estate investing in Canada. You can benefit from property appreciation and build equity over time. Look for homes in areas with strong population growth and rising prices.

Consider factors like neighbourhood desirability, proximity to amenities, and potential for renovations to increase value. Research local market trends and home prices to identify promising locations.

Purchasing a residential property comes with costs, many of which are overlooked by first-time buyers. Outside of your down payment, expect large and ongoing costs like property taxes, maintenance, and, of course, your mortgage payments.

Residential rental properties

This type of property is typically acquired after you’ve bought your first home. Although it is possible to acquire your first residential home as a rental property, most choose to live in it and buy additional properties for rentals.

Investing in rental properties can provide steady income and long-term appreciation. Look for areas with high rental demand, such as near universities or growing employment hubs.

Research local vacancy rates and average rents to estimate potential returns. Consider multi-unit properties to maximize rental income from a single investment.

Be prepared to handle tenant management, property maintenance, and local landlord-tenant regulations. Factor in costs like insurance, property management fees, and potential vacancies when calculating your expected returns.

A caveat for this type of real estate, however. I have witnessed numerous people get in hot water over the last half decade when it comes to rental properties. Due to rising interest rates bloating mortgages and property prices, a lot of landlords are not only cash-flow negative on their rentals, but are also facing a decline in property values relative to their purchase price.

There is zero sympathy for landlords. I know this from being one myself in the past. You take on the full risks of the investment, and it can turn sour very quickly.

Commercial real estate

Commercial properties, including office buildings, retail spaces, and warehouses, can offer higher returns but often require larger down payments. Look for properties in prime locations with strong tenant potential.

Research local business trends and economic factors affecting commercial demand. Consider properties with long-term leases from established tenants for more stable income.

Be prepared for more complex management requirements and potential longer vacancy periods between tenants. Familiarize yourself with zoning laws and commercial property regulations in your target area.

In today’s day and age, it is also very important you are careful in selecting the type of commercial property you’d like to own. Online shopping and an economic downturn has led to commercial real estate properties being under significant pressure, and many landlords are suffering.

Vacation home

Investing in vacation properties can provide rental income and personal enjoyment.

If you’re looking to buy your vacation property solely for you, pick a destination that you won’t get tired of. If you’re looking to AirBNB the property when you’re not there, focus on popular tourist destinations or areas with growing vacation appeal in addition to where you’d like to stay.

Research seasonal demand patterns and occupancy rates. Consider properties with unique features or prime locations to stand out in the competitive short-term rental market.

Be prepared for more intensive property management and marketing efforts if you are doing a combination of living and renting.

Most importantly, familiarize yourself with local regulations on short-term rentals, as these can change depending on where you buy.

Raw land

Investing in undeveloped land can offer significant appreciation potential but requires patience and careful planning. Look for areas with future development potential or natural resource value.

This type of investing is typically done by those with a little more money, and is almost exclusively done on an investing basis, not a living basis.

Research local zoning laws and development plans to understand potential future uses. Consider factors like access to utilities and transportation when evaluating land parcels.

Be prepared for potentially long holding periods with little to no income, and make sure you have the capital to cover these costs.

Factor in property taxes and any necessary maintenance costs when calculating your investment returns.

Acreages/Farms

Investing in agricultural properties can provide both income potential and land appreciation. Look for properties with productive soil and adequate water resources.

Research local agricultural markets and potential crops or livestock suitable for the area. Consider properties with existing infrastructure like barns or irrigation systems. Although these will come at a cost, if you’re actually looking to operate a business on the farm, they’re almost a must, and building new can become quite costly.

Be prepared for the unique challenges of managing agricultural operations or finding reliable tenants to farm the land.

Why investing in Canadian real estate has become so popular

Canadian real estate has been appreciating for two decades due to strong fundamentals and a massive housing shortage.

Population growth is a key driver, with unprecedented increases fueling demand, particularly in the multifamily sector.

Home prices have risen steadily in many areas, though affordability challenges persist. You’ll find regional variations in price trends, with some markets experiencing rapid growth while others offer more stable, gradual appreciation.

A prime example of this would be where I am from, Alberta. Because of the cyclical nature of our economy, real estate hasn’t gone up as much as hotbeds like BC or Ontario. However, post-pandemic we are seeing a massive amount of interprovincial immigration to take advantage of our lower housing prices.

Past returns of Canadian real estate hotbeds are fueling the popularity

Toronto, Vancouver, and Montreal are Canada’s largest real estate markets, each with unique characteristics for investors.

Toronto’s market is known for its large demand and high prices. You’ll find a diverse range of property types, from condos to single-family homes, typically with eye-watering prices.

The Greater Toronto Area continues to attract immigrants and businesses, supporting long-term growth.

Vancouver boasts some of Canada’s most expensive real estate. In my opinion, it is the most beautiful city in the country. As a result, demand is continually through the roof.

Montreal offers more affordable options compared to Toronto and Vancouver. The city’s vibrant culture and growing tech sector make it attractive to young professionals and students, creating opportunities in the rental market.

These hotbeds have been under an intense amount of pricing pressure in a post-pandemic world, with many individuals and landlords facing negative equity from falling prices. Whether they will be the real estate hotbeds moving forward is a discussion for another article.

A more passive way to invest in real estate: Real Estate Investment Trusts (REITs)

REITs offer a way to invest in real estate without directly owning properties. These trusts own and operate income-producing real estate, allowing investors to purchase shares and receive dividends.

The trusts are structured in a way that forces the company to distribution the vast majority of its earnings back to shareholders (typically over 90%).

Canadian REITs focus on various sectors, including:

Residential apartments
Office buildings
Retail centres
Industrial properties
Healthcare facilities

Instead of accumulating a down payment and handling all of the burdens of owning real estate yourself, investors can simply purchase these REITs on the open market and sit back and relax.

There are some caveats here, however. For one, you are putting your dollars in someone else’s hands, relying on them to manage the properties efficiently and identify promising real estate.

Sure, these are expert management teams. However, many REITs have done a horrible job over the years, so positive returns are far from guaranteed.

And secondly, these REITs trade on an open market, and prices fluctuate on a day to day basis. Market sentiment can cause significant volatility for even a REIT with a rock-solid portfolio of assets.

Real estate investing comes with costs, make sure you know them

Many new real estate investors overlook simple costs that can turn an investment from cash flow positive to cash flow negative on a dime.

Regardless of what Canadian investment properties have done in the past, there is zero guarantee they will provide positive returns in the future.

Enter at your own risk and be prepared to take some lumps along the way. I know I certainly did, being a landlord for the better part of 9 years.

Mortgages and financing

When investing in Canadian real estate, securing proper financing is key. Mortgage rates play a significant role in your investment’s profitability.

Ask anyone with a variable rate mortgage during the COVID-19 pandemic who witnessed their payments nearly double in a very short order. As a landlord, you assume the entirety of this risk, and expect zero sympathy in the event your investment turns sour.

Consider different mortgage types:

Fixed-rate mortgages offer stability
Variable-rate mortgages may provide lower initial rates, but pose much higher risk to fluctuating prices

A larger down payment can lead to better terms and lower monthly costs. Aim for at least 20% to avoid mortgage insurance.

However, banks do like insured mortgages, and in some particular situations, you can secure a better rate on an insured mortgage. Make sure to crunch the costs with your realtor.

Do not overlook taxes

Property taxes are ongoing expenses you’ll need to factor into your budget. These vary by municipality and property value.

Here’s the deal with these types of expenses, and I say this as someone who’s experienced it first hand: they never go down, only up.

In my 15+ years of home ownership, particularly when I used to own a condo, I have never witnessed my property taxes or my condo fees go down.

If you own a home for personal living, you will get very little tax benefits from the government.

However, if you’re operating a rental, you may be able to claim some tax benefits:

Claim mortgage interest as a deduction
Deduct property management fees
Write off maintenance and repair expenses

If you are buying a rental, figure out your cap rate

To assess your investment’s performance, you’ll need to calculate returns accurately. Consider both cash flow and appreciation.

Cash flow is the income generated after expenses:

Rental income
Minus mortgage payments, taxes, insurance, and maintenance

Property appreciation contributes to your overall return. Research historical price trends in your target area to estimate potential future gains.

Use the capitalization rate (cap rate) to compare properties: Cap Rate = (Net Operating Income / Property Value) x 100.

It is also important to project your cap rate into the future. You know that taxes, insurance, and property taxes will continue to go up in the future. If your current cap rate is razor thin in terms of profitability, you will likely sink into cash flow negative territory in the future.

Landlord risks you cannot overlook

As I’ve mentioned numerous times in this piece, as a landlord, there will be absolutely zero sympathy as costs go up. And make no mistake about it, costs will go up.

Much like an investment in the stock market, you assume all risks becoming a real-estate investor. The skyrocketing price of real estate in Canada has made it so many feel it is a no-brainer in terms of popularity.

However, in particular situations landlords can and will lose money. Make no mistake.

Volatility and interest rate risk

Real estate markets can fluctuate, impacting property values and potential returns.

In addition to this, interest rate fluctuations can affect mortgage payments and property affordability. If you don’t believe me, ask the multitude of landlords that leveraged themselves during the COVID-19 pandemic and faced the highest pace of interest rate increases in history.

Although you cannot protect yourself entirely, you can take some risk-mitigating steps:

Opt for fixed-rate mortgages to lock in favourable rates
Build a financial buffer to manage potential rate increases
Stay informed about economic trends and Bank of Canada policies

Tenant and vacancy risks

As someone who rented a property for 9+ years, I can tell you that one bad apple tends to spoil the batch.

I rented my home for 8 of those years with very little issues. However, the final tenant in my home ended up costing me $20,000+ out of pocket. In fact, this type of risk is the main reason I stepped away from being a landlord.

Finding reliable tenants and maintaining occupancy are crucial for rental property success. To mitigate these risks:

Conduct thorough tenant screenings, including credit checks and references
Offer competitive rent prices to attract quality tenants
Maintain good relationships with tenants to encourage long-term occupancy
Consider hiring a property management company to handle tenant-related issues

Unexpected costs have to be expected

At some point, whether you are living in a home yourself or are a landlord, unexpected costs will come up.

They key here is to make these unexpected costs expected. When you are buying a home, expect a 5-figure cost to hit you eventually. Whether it be a new roof, a new furnace, new windows, or any of the other added costs that come with ownership.

Property maintenance and unforeseen expenses can significantly impact your investment returns. To manage these risks effectively:

Conduct thorough property inspections before purchasing
Create a maintenance schedule and budget for regular upkeep
Set aside an emergency fund for unexpected repairs (aim for 1-3% of the property value annually)
Consider purchasing property insurance with comprehensive coverage

The number one way to mitigate these costs is preventative maintenance and taking care of the home you live in.

Research, research, research!

If you are buying a home to simply make it your primary residence, this isn’t as critical. However, if you’re looking to become a landlord, thorough research is your best defence against poor investment choices.

Start by analyzing neighbourhood demographics, employment rates, and future development plans. These factors can significantly impact property values and rental demand.

Investigate local zoning laws and building codes to understand potential restrictions on property use or renovations. Check the property’s history for any issues that could affect its value or your ability to rent it out.

Consider accessibility factors like proximity to public transit, schools, and amenities. These can greatly influence a property’s desirability to tenants or future buyers.

Do you need a realtor when buying real estate in Canada?

Real estate investing in Canada has been seen as a no-brainer in terms of making outsized returns in the past. So much so that many don’t believe they need professionals like realtors to help them out.

I will tell you right now, a good realtor is worth every single dollar you give them, and can help you avoid potential disasters.

I have known numerous buyers who opted out of using realtors, only to face tens of thousands of dollars in added costs down the line that a realtor would have identified easily.

When investing in Canadian real estate, partnering with a knowledgeable agent is essential. Look for an agent with experience in investment properties and a deep understanding of local markets.

Your agent should be able to analyze potential returns, advise on rental market conditions, and help you navigate the complexities of investment property purchases.