Alternative Investments in Real Estate

Since the first investment was made many hundreds of years ago, a term that can be heard again and again is ?the higher the risk, the higher the return.? While this may be true in some instances, it doesn?t always have to be the case. Most common investments range from GIC?s to mutual funds to publically traded companies (stocks). GIC?s may get you a safe 2%, barely, if even keeping up with inflation. Mutual funds, while more risky than a GIC, diversifies you in the market therefore spreading your risk across multiple funds. Returns for funds are all over the board depending on the products selected, who is managing it, where they invest etc. They also usually come with a MER fee; basically the amount that you get charged annually to run the fund and cover expenses. Stocks are similar to mutual funds, except all your eggs are going into one basket. Rumour and speculation are enough to send most stocks on a roller coaster ride and unless you?re invested for the long term or have a strong stomach, may experience some sort of motion sickness following them along the ride.

What if it didn?t need to be like this? What if there were investments out there that were safe while generating great returns, year after year? Here are a few types of investments you may not be aware of that are tied to real estate.

Private Mortgage Financing

With financial institutions becoming more picky about who they finance, there are many people that still need money to purchase property that don?t qualify under traditional prime lenders. Self-employed, new immigrants, people without credit history, and more. Basically, the investor is the bank in this case. Proper due diligence is essential (as with any investment) and returns are typically in the 6-10% range for a first mortgage and 12-17% for a second mortgage.

Investments start around $20,000 and go up from there. Every lender is different depending on risk tolerance but traditional loan to value for these mortgages are typically up to 85%. (85% of the value of your home) This still leaves room to reclaim most if not all money should something go wrong and the investor need to take over the property.

Pros

  • Investor on title. (security)
  • Low maintenance investment.
  • Fixed retuns.
  • Monthly income.

Cons

  • Lack of liquidity. (may be tough to get out of before end of term)
  • May have to reclaim property if owner stops paying.

Lease Options

This type of investment involves finding a tenant that won?t qualify for a mortgage but has the income and job security to comfortably pay the bills each month. People that have claimed bankruptcy, gone through consumer proposal, or have other blemishes on their credit are ideal for this. The investor purchases the home in their name and rents it out to the tenant. (Who places a small amount down) The tenant pays the equivalent of the mortgage and taxes plus a portion of which goes into a separate account to help them save for when they take over the property. Terms are usually 3 years and the future price of the home is set beforehand to ensure transparency. After the 3 years, the tenant now uses the money put aside every month as a down payment and the home is transferred from the investor to them. Between mortgage pay down and conservative annual appreciation, returns are usually in the 18-30% range.

Pros

  • Typically better quality tenants than traditional renters.
  • Great cash on cash returns.
  • Tenant pays all maintenance and repairs for property.

Cons

  • Investor must qualify and carry a mortgage.
  • High capital outlay. (usually 20% of purchase price)
  • If market doesn?t appreciate, returns may be smaller.

Mortgage Syndication

Developers for large residential and commercial projects will often seek an alternative type of loan than what the bank offers. Because they make all their money at the end of the project when it?s sold or refinanced, having a lump sum of capital and paying principal and interest every month doesn?t make sense for them. In exchange for investor money, they often times offer a set quarterly dividend payment as well as a stake in the equity of the project paid at the completion. Investor?s names are on title of the project to give them security should something go wrong. It?s referred to as syndication because money is pooled together from multiple sources to create the total amount. Investments start around $25,000 and go up to the total value the project needs. Returns range between 9-25% depending on the builder and project.

Pros

  • Hands off investment.
  • Ability to choose specific project to invest in.
  • Great returns.
  • Opportunity to invest in large scale development projects.

Cons

  • Longer time horizon. (3-6 year range)
  • Can be tough to get capital out once invested.

The investor will never completely eliminate all risk, but if investments are properly researched and due diligence is done; most risk can be filtered out. As seen above, risk doesn?t always have to be tied to reward. Since the real estate market works on long term cycles, there aren?t the typical volatilities associated with other investments. Happy and safe investing. (with great returns too!)

 

Toronto-based Realtor and Active Investor Mitch Parker understands a home is a lot more than just an address; it?s a lifestyle.?As an expert on buying, selling and investing in Real Estate, he helps both End Users and Investors, whether new or seasoned, realize their ultimate goals.

Living in a city he loves, Mitch realizes the importance of being heavily involved in the community. Mitch has worked with organizations?that are close to his heart including Habitat for Humanity and the Heart and Stroke Foundation. Mitch also lends an active voice to the city’s associations of Business Improvement Areas understanding the importance of aiding in the creation of a thriving and competitive Toronto.?

When he’s not thinking Real Estate, Mitch’s passions include fitness, cars and exploring the city.?

For more information, please visit:?www.mitchparker.ca?and follow him on Twitter: @MitchParkerRE

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