The real estate market has only begun to recover from a combination of challenges like the expanded B20 stress test that tightened the reins on borrowing, a shortage of affordable housing, and increases in construction costs. The sector has held up against these stressors, with prime markets like Toronto and Vancouver maintaining their status as leading property destinations for investors. The investments in these cities are spread out across all asset classes, with a percentage of the investment capital flowing through pooled capital investments, including REITs, MICs, and private funds.
When investing in real estate, buying properties directly is not always the best way to diversify. A stable portfolio may contain a combination of stocks, bonds, equities, and real estate, which attracts investors with the tangible security of properties. While the direct ownership of real estate assets is one of the more popular channels for liquidation, it may not always be the best way to diversify. Often, a better strategy for mitigating risk is to instead inject capital into a pool of properties.
As a more efficient method of almost instant diversification, MICs have grown in popularity among investors.
Diving into Property Investment Pools
Owning real estate property can provide income security derived from rents or dividend payments, and it is a powerful hedge against inflation as rents tend to increase when interest rates rise. However, from the acquisition cost down to the tedious processing of legal documents, it takes a lot to own and manage a real asset. Unless you hire a professional manager, there is very little that is passive about buying rental properties.
For many investors, direct ownership is neither an optimal use of their resources nor an efficient way of spreading out the risks. When all your attention is focused on property management, there’s little room for creative liquidation strategies and finding more viable ventures. Real estate investing provides diversification, but where you concentrate your capital matters.
Instead of spending more capital on acquiring commercial properties and becoming a landlord, consider earning long-term income by engaging in real estate investment pools like:
- Investment Funds
- Direct Investing (SPV)
These real estate investment vehicles feature different investment approaches, As an investor, it is your responsibility to research which ones will be best for your portfolio, family, and future. Create a timeline, and consider these factors before diving into the pool of investments.
Invest in Real Estate Asset Classes
As the saying goes, “Don’t put all your eggs in one basket.” Your portfolio should be spread out over various asset classes based on your investment boundary and risk profile regardless of the current investment trend you are following.
By means of pooled investments, investors can quickly distribute risk through various real estate asset classes including mortgages, houses and apartments, offices, commercial buildings, shopping centres and malls, warehouses, and data centres or in various sectors as long as there is potential for industry gains. The primary goal is, of course, income.
Investing in these vessels also removes direct obligations from your end since you will be joining a multitude of other investors in addition to a dedicated team who will assess and manage your pooled money.
Owning shares in large commercial real estate across Canada by pooling funds with other investors is possible through these combined opportunities or by merely engaging in mortgage-oriented funds.
Mortgage investment funds, for example, play a more critical role in serving investors or other funds from different niches by lending them capital. From average investors to high-net-worth (HNW) individuals, passive income investments are now widespread across Canada. Historically, these passive investments have consistently outperformed their active counterparts whose bigger short-term gains are no longer enough to tempt the market.
One of the most appealing features of pooled investment funds is liquidity. Generally, investors can withdraw their shares after serving an initial holding period.
Unlike direct property ownership, Investing in such funds grants you the privilege to quickly move your shares out without enduring tedious processes.
Better Risk Management
We have heard a lot of advice on how to lessen investment risks, and one of the more efficient methods of doing so is through pooled investments. Some property investors opt for direct investment in property that can potentially earn back 100% of the capital; the caveat, however, is that it also shoulders the same percentage of risk. This “all-in” type of investment scenario highly relies on the sole performance of the individual property, current market conditions, and the size of the invested amount.
Pooled investments offer sounder risk management. Although you share the properties with other investors, the profit is equitably distributed based on each investment. The risk is further mitigated through diversification across various asset classes.
The Hunt for Yield
From a security perspective, mortgage holders have more priority over equity holders in terms of the order of payout in the case of default. This is a compelling reason to be in the first position during a cooling market, one that may trigger a default.
There has been a significant rise in the adoption of private mortgages as traditional bank lenders further tighten mortgage qualification criteria. This has created a growing demand in the private money sector. At the same time, lenders stand to benefit from rising home prices, which are expected to appreciate to 2.1% in 2020.
Aside from market conditions, geography also matters when investing in mortgage funds. You must know where the firm is placing your money, and it is best to consider vital areas or those with excellent potential based on the asset class
Choose Your Risk
Whichever investment opportunity you opt into, it all boils down to mitigating risks while maximizing ROI. Before you commit to any of these investments, conduct your own research and consult a professional on what type of investment is suitable for you.