Is buying your own rental property the only way to get exposure to the real estate market? Of course not. However, it’s usually the first thought that comes to mind when the idea of real estate investing is mentioned.
Two popular examples of investing in real estate without becoming a landlord are Real Estate Investment Trusts (REITs) and private co-investments. In both cases, investors pool their funds together and a professional management team takes care of finding properties and managing them at a profit. These hands-off opportunities can offer excellent returns without the drawbacks of being a landlord.
So, how do you know if these opportunities are right for you? First and foremost, we suggest you talk to an investment representative. However, if you’re looking to do your own due diligence on these opportunities, here are 3 things to consider:
1)The Asset Type
Real estate can be a broad topic, but what type of real estate is available in Canada? Here are the four main categories of real estate:
- Residential Real Estate
This is the most common type of real estate. This includes single, condominiums, co-ops, townhouses, etc. These can be either resale homes or new construction.
- Commercial Real Estate
These are income producing properties. This includes hotels, medical buildings, shopping complexes, office buildings etc. Apartment buildings, though residential, are often considered commercial real estate because they are owned to produce income.
- Industrial Real Estate
These are manufacturing buildings and warehouse properties. Buildings used for production, storage and distribution of products.
- Land
Vacant land, working agricultural spaces and ranches. This also includes undeveloped and early development real estate projects (subdivisions etc.)
The asset is typically the most important part of any real estate transaction. Whether it’s a buy-and-hold for a single family property or a pooled co-investment in a portfolio of real estate assets. Having a good understanding of the asset type and the specific risk associated with it is critical to your investment success.
2)The Property
The first place to start when analyzing a property is with its cap rate. A cap rate is the net income of a property divided by its acquisition price expressed as a percentage. Different geographies and asset types command different cap rates. For example, an apartment building in Toronto has a different cap rate than an office building in Oakville. Therefore, understanding if the cap rate on your potential investment is competitive is very important.
3)The Manager
Whether your project requires a property manager, asset manager or both, its important to hire experienced professionals. Ensure that these professionals have experience working with the chosen asset type, have a solid record of post acquisition management and are consistent in their overall management.
To summarize, its important to understand what type of real estate assets you want to invest in; how to analyze a property; and how to assess the quality of the management team when considering hands-off real estate investment opportunities.
