6 Ways to Invest in Real Estate Passively

People love to talk about real estate in Canada.  Especially with recent years of skyrocketing prices in Vancouver and Toronto, real estate is the topic of conversations around the water cooler, and whether this is the year the Leafs will win the Cup (of course, this is from an Ontario perspective!).

However, one topic that is not discussed or understood by the majority of Canadians is how to invest in real estate passively.  I believe that the majority of Canadians are like me, in that, they want to invest in real estate, but do not have the time or energy to become an active real estate investor/landlord. 

Here are 6 ways to invest in real estate passively:

REITs

REITs stand for “Real Estate Investment Trusts”, which are basically real-estate flavoured stocks. Each REIT’s portfolio usually specializes in a specific real estate sector, such as owning and operating shopping malls, apartment complexes, office buildings etc….This allows an individual investor to invest in companies that invest in real estate without directly owning real estate themselves.  

A REIT generates revenue by leasing and selling real estate assets, and then distributes monthly distributions to the investor.  

You can purchase individual publicly traded REITs or ETFs that holds multiple REITs, such as BMO ZRE or Vanguard VRE

This is a liquid investment, where you can sell your share holdings in the REIT at any time.  Annual distribution yields range between 4-7%

Mortgage Investment Corporations (MICs)

MICs are investment and lending companies that are in the business of mortgage lending to residential and commercial mortgages.  This investment vehicle allows individual investors to pool their funds together in the MIC, and the managers of the MIC then loan out the pooled funds to individuals or companies that can’t qualify for a traditional bank mortgage.  

A MIC generates revenue by receiving interest payments on the mortgages, and then distributes monthly income to the investor.

MICs are publicly traded on the TSX.  For a list of Canadian MICs, please see the following link.

This is a liquid investment, whereby you can sell your share holdings in the MIC at any time. Annual distribution yields range between 5-10%.

Private Mortgage Loans

Private mortgage loans encompass first and second mortgages that involve lending money to residential or commercial borrowers.  These mortgage loans can either by funded by a single individual or by 2 or more individuals (syndicated).  There is usually a minimum investment requirement.  A mortgage broker acts an an intermediary agent.

You are basically acting as the bank, lending your money to the borrower, with real estate as the security. 

In contrast to REITs or MICs, you are investing directly into real estate, since you, the investor, are registered on title as a charge holder against the property.  You get to also choose which mortgage loan to invest in.

Typically, the borrower will agree to make monthly interest payments at a specified interest rate for a period of time, then repays the full loan amount at a specified date.  Time duration can vary between 3 months to 3 years.

First mortgages implies that you are first in line to get back your money from the property, if the borrower fails to make the obligated payments.   Second mortgages implies that you are second in line.

Therefore, first mortgages are less risky, and annualized interest rates are in the range of 8-10%, while second mortgages are more risky with higher annualized interest rates in the range of 10-14%.  

This is an illiquid investment, as you do not receive your funds back until the end of the mortgage contract.

Private Equity

Private Equity firms usually concentrate in a specific area for their real estate portfolio, whether it be a condominium development, senior homes, apartment buildings, shopping malls etc…it can vary greatly from one firm to another.

Majority of private equity firms only allow accredited investors to invest into their real estate portfolios. To be an accredited investor in Canada, you need to meet 1 of the following criteria:

Income

  • Your net income before taxes exceeded $200,000 in both of the last two years and you expect to maintain at least the same level of income this year; OR
  • Your net income before taxes, combined with that of a spouse, exceeded $300,000 in both of the last two years and you expect to maintain at least the same level  income this year;

Financial Assets

  • You alone or together with a spouse, own financial assets worth more than $1 million before taxes but net of related liabilities. Cash, or certain investments such as public equity or bonds, would be considered liquid/financial assets.

Net Assets

  • You, who alone or together with a spouse, have net assets of at least $5,000,000

Private equity fund investments are suggested to be only suitable for those individual or institutional investors who can afford to have their capital locked in for long periods of time and who are able to risk losing significant amounts of money. This is balanced by the potential benefits of increased annual returns

This is an illiquid investment, as most investments in private equity firms require your funds to be locked in for years, in which you may or may not receive monthly/yearly distributions depending on the nature of investment.   There is usually a minimum investment requirement.

Annualized rates of return vary from 5-15% to over 20%, depending on the type of investment

Joint Venture

A Joint Venture is an agreement bringing 2 or more parties together to pool their resources (skills, funds etc…) to accomplish a specific deal/task.   

In real estate, there are many different types of Joint Ventures, but the most common set-up for a passive real estate investor is between a silent money partner (yourself) and an active real estate investor.

You are investing directly into real estate equity.  In this scenario, the silent money partner is providing the funds for the deal, while the active real estate investor uses his knowledge/experience and his team (real estate agent, mortgage broker, contractor, lawyer) to find a property and execute successfully a real estate strategy (i.e. BRRR, wholesale, rent-to-own, flipping).   Profits are usually split 50/50 between the 2 partners. 

This is an illiquid investment.  You get your funds/profits back when you and your partner refinance or sell the property.

Annualized rates of returns vary (minimum 15-20% and higher), depending on the property.   

Real Estate Crowdfunding

In the United States, real estate crowdfunding is becoming a popular model for real estate investing. Since 2012, there are over 100 companies in the United States, some of which have disappeared, while others have flourished.  New companies are popping up all the time in the United States, and now they have arrived in Canada.

These companies are basically online platforms that acts as an intermediary between the investor and and the borrower.  It allows pooling of funds (similar to syndicated mortgages) from small or big investors to fund a variety of deals, depending on what the Real Estate Crowdfunding company focuses on.   

These deals can range from debt (mortgage) vs equity investments, residential vs commercial/development projects.  Essentially they can involve any type of real estate investment.

Similar to other industries, crowdfunding is potentially a “technology disrupter” in the real estate investment industry.

Main benefit to investors is to allow them access and choice to a wide variety of projects (small or large) at minimum investment amounts, that they themselves would not be able to invest on their own.  

Main benefit to the borrowers/developers is to allow them access to capital with fewer hurdles in a shorter time frame

Real estate crowdfunding in Canada is in its infancy, and it is difficult to see what the future lies for these companies in Canada.   I personally have not deployed any of my funds into these platforms yet. For now, I am watching from the sidelines, to see how this unfolds in Canada.  

TAKE-AWAY POINTS

  • You may feel a bit overwhelmed with all the different types of real estate investments, however, you don’t need to invest in every type.  Find one or two strategies that matches your investment needs/temperament, and then become an expert in that strategy.

  • With any real estate investment, DUE DILIGENCE IS A MUST!!!   Try to find out the track-record of the company, mortgage broker or active real estate investor that you want to invest with and any reviews/complaints. Find out what is their process of vetting out the deals that they present to you.

  • Educate yourself in the different types of investments: debt vs equity, residential vs commercial. Find out which type of investment (and time-frame) you are most comfortable with.  

  • Don’t feel rushed or pressured into investing into something that you don’t feel comfortable with or don’t understand.  Don’t invest because you have a Fear Of Missing Out (FOMO).  Take your time.  You don’t have to swing at every pitch.  

  • Real estate investments take more time/effort at the beginning vs. clicking the mouse button to buy a stock/ETF.   It’s essential to do educate yourself and do your due diligence in the initial stages, in order to find a successful, trustworthy company, mortgage broker or active real estate investor to work with.  Once this hard part is done, a strong foundation is laid out for building your real estate empire, and then “you are off to the races”!

Do you have any experience investing in any of these investment vehicles?  Any successful or failed deals?  Any other real estate investments that you use?

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5 Comments on "6 Ways to Invest in Real Estate Passively"

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Loonie Doctor
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An excellent overview of options. I bought a fixer upper for our first house – basically because it was all we could afford. I renovated and sold for a healthy profit a few years later. We also transiently rented out a property that we eventually built on. That was enough for me to realize that active real estate investing was too much work for my tastes. I now stick with REITs which make up about 10% of my portfolio. I have been using them as a “bond alternative” in the income allocation since interest rates were so low. The yields… Read more »
Jake D
Guest

Great information, although I think some of it may go over certain people’s heads (if they’re way too new in real estate investing). I’ve been in the industry for about a year now, and it takes a while to wrap everything around your head. I think one of the most important points is in your takeaways… you don’t need to use every form of investment. It’s almost like picking a niche in other businesses, just stick to one type and become an expert at it while creating a stable base of income. Then branch out and explore. Love it!

Dona Sells
Guest

This are great ways to invest in real estate! A must read article!