Passive Real Estate Income Ideas for High Net Worth Canadians

Passive income is no longer an option for many Canadians seeking a comfortable retirement. It’s prudent to plan early on for alternative sources of income as many people don’t have the luxury of time to become an active investor. Diversification beyond equities and indices may lead you down the path of real estate. One could think of a real estate fund as a pool of assets comprised of real estate investments making up different segments of the market as well as adding further diversity through their varied locations.

There are various types of passive and active investments that Canadians can participate in. Actively managed money represents 89% of total investments despite a growing trend showing that passively managed money has grown in excess of 400% since 2007. A mere 8.14% of Canadian equity funds outperformed the benchmark Toronto Stock Exchange index over the last 10 years.

One relatively stable and consistent performing source of passive income has been real estate.
Owning a passive real estate investment is generally an exceptional way of creating a fixed method of profit, offering retirement funds faster, and of course, retiring earlier than anticipated. Last year, Canadian passive funds increased to $13 billion while active funds represented $18 billion only. The fact that people will always need a place to live regardless of the location and situation creates a sustainable demand for real estate.

Effortless Real Estate

There are many ways to earn income from real estate; it could be either direct or indirect investments. Of these two, the direct purchasing of assets, otherwise referred to as an active investment, allows you to take control of your properties and perform all associated obligations. The second is through indirect investment, a more passive approach that allows you to delegate property management to a dedicated team.

Direct ownership, requires higher upfront expenses but usually generates more significant potential returns. It also involves more maintenance work, hassles, and legalities since you are the landlord. Indirect investments, on the other hand, can be done through real estate investment trusts (REITs) or other forms of funds that do not include direct ownership of the given property.

Indirect investments can be more feasible for many Canadians due to fewer risks and required work. Canadian passive funds are slowly getting the spotlight from high-net-worth investors, and they are strategically allocating their funds to any of the following passive real estate income sources:

  1. Crowdfunding – Crowdfunding real estate investment in Canada is poised to grow, and most of these platforms are open to virtually any investor.
  2. Individual equity in various types of real estate properties is made available through the means of a registered crowdfunded website. These websites allow smaller companies to access capital from a wide range of investors in order to successfully proceed with the project.

    There are many crowdfunding sites currently flourishing globally, but they all have the same intention of helping both sides—the real estate and the investor aspects. Crowdfunding sites help real estate owners such as developers, property managers, and even homeowners to establish equity for their property or projects.

  3. Joint Venture – Getting into a joint venture in real estate is another good way of earning passive income. Typically, in joint ventures, the active and passive investors agree into a 50-50 partnership. If delivered successfully, they can earn a substantial annual rate of return.
  4. As Don Campbell and Russell Westcott mention in their book Real Estate Joint Ventures “successful joint ventures are the keys to growing a real estate portfolio. They are a great match of expertise -– real estate expertise on the one hand, and financial expertise on the other.”

  5. REITs – Real estate is perhaps one of the most subtle yet high-paying dividend investments, which is why many investors carefully consider adding REITs to their portfolio. Apart from diversification, REITs provide pure passive income.
  6. Look for REITs carrying properties in their portfolio that can bring stronger rental income, paying particular attention to the following growing classes of real estate: commercial, residential, shopping malls, industrial, storage, and healthcare. As an investor in a REIT, you will have the chance to own a portion of real estate without any active management obligations.

  7. MICs – Much like REITs, investing in MICs can also lead to strategic passive income. Having shares in a mortgage investment corporation (MIC) qualifies you to invest in a company that operates a diversified and secured pool of mortgages. Especially in the current real estate trend of passive investing, many people are looking into MICs to fund their real estate investment ambitions for stable performance.
  8. Private Mortgage LoansPrivate mortgage loans are another passive investment vehicle. They can either be financed by an individual or syndicated (2 or more people). You will primarily be lending your money to individual residential property owners offering their home as collateral.
  9. There will only be a broker who will act as a representative. Unlike MICs or REITs, a private mortgage loan is directly invested in the property since you are listed on the title as a charge holder against the property.

Where to Focus in Real Estate

When it comes to investing in funds, the Canadian commercial real estate sector is one of the leaders in the current investment market and is a perfect choice for passive income investors. Commercial properties are the top choice for income investors because contracts that specify the lease terms usually shield these properties. Tenants cannot easily terminate the contract without following defined rules, which means that the rental prices are still intact and are less affected by economic situations. Investors are also usually protected by these contracts in case there are market turnarounds.

When looking for commercial properties in Canada, always look for in-demand locations and those with a positive economic outlook. Still, the best places to invest in commercial spaces are in Toronto and Vancouver. These two major areas have consistently had the most livable downtown office vacancies and often rank the lowest industrial availability rates.

Other real estate property sectors that are also strong performers for passive income include hotels and resorts, offices, storage and warehouse, and residential mortgages. The total amount you will earn from each investment may vary over the years; it gets better when invested longer, providing more passive income.

Investing in the Right Team

Generally, becoming an active investor in real estate can yield more income, but it will surely take time and effort. However, if you choose to invest passively, your work will predominantly be at the beginning, which will only require you to invest your time in doing the due diligence behind selecting the best real estate investment vehicle. After all the initial research and selection, you will then start receiving a generally steady stream of passive income through your chosen vehicle.

The key to having passive income in real estate is the management team you choose. An excellent management team will work towards securing and stabilizing returns from a healthy and growing portfolio.