There are ways to own a house without a massive down payment
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Andrey Popov/Shutterstock As the cost of housing continues to rise, some people are feeling homeownership slip through their fingers. But just because you don’t own your primary residence, that doesn’t mean you can’t invest in real estate. There are different options available, and not all of them require a massive down payment.
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Real estate investment trusts Real estate investment trusts (REITs) are a popular real estate investment option since they give you access to commercial properties, shopping malls, multi-unit residential buildings, and other investments.
The REIT operator purchases properties and collects rental income. Once all the expenses are paid, the profit is distributed to its unitholders monthly, quarterly, or annually in the form of dividends.
Purchasing REITs is easy since many are publicly traded on the stock market. Investors are attracted to REITs as you can often buy a unit for less than $20 (plus any trading fees). That’s clearly appealing to anyone who wants to invest in real estate and doesn’t have a substantial down payment. Plus, you don’t need to worry about any closing costs or lawyer fees.
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Article content Besides the cost of the units you’re purchasing, the only other fee you would pay is a trading fee (if any). This fee is typically no more than $10 and applies whenever you buy or sell an investment product through your discount brokerage. It’s basically a commission your brokerage charges.
Since REITs are a fairly liquid asset, you can quickly sell off part of your investment if you need cash quickly. This is quite the contrast to traditional property ownership, where you can’t just sell off a room or a few bricks. Not only can it take a while to sell your home, but you’ll also have to pay substantial fees.
The other appealing aspect about REITs is that you can hold them within your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA), where the tax implications are reduced or non-existent.
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Article content Investment properties If you prefer to own something physical, purchasing an investment property might appeal to you since it can generate income. With an investment property, you’re not restricted to where you live. You could purchase one in a city where prices are lower and you can afford a down payment.
That said, you are the landlord, so you’re responsible for the cost of maintenance and repairs. If you’ve purchased the home in another city, you may need to hire a property manager to take care of things for you.
You also need to consider the down payment. When purchasing a property that’s not owner-occupied, in Canada the down payment must be at least 20 per cent. You also wouldn’t be able to take advantage of some available benefits aimed at new homeowners. For example, rental properties don’t qualify for the Home Buyers’ Plan, which allows you to withdraw up to $35,000 from your Registered Retirement Savings Plan (RRSP) for a down payment.
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Article content Also, think about your intentions. If you plan on using your rental property for short-term rentals, you need to check with the local municipality to see if there are any rules in place. You might learn that the red tape trouble may not be worth it.
Even though real estate prices and market rents have risen in parts of the country, an investment property is not a guarantee. If the monthly rent is more than your expenses, you have a cash flow positive property. However, if your costs exceed the income generated, you’re losing money every month. Banking on future appreciation to make your investment worthwhile is basically gambling.
Real estate crowdfunding Real estate crowdfunding has been around for a few years now, but it’s become more popular as people seek to take advantage of skyrocketing prices with little money down.
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Article content Companies such as Addy, NexusCrowd, and RealtyShares purchase income-generating properties and then offer them back to the public. The number of units available for each property depends on the company. As an example, a $1 million property might have one million units available. That means you can purchase into the investment for as low as $1, plus any membership fees.
The appeal of crowdfunded real estate opportunities is clear. Not only do you not need much money to invest, but the properties are vetted by a group of experienced professionals. In addition, each available property has an estimated return and distribution schedule, so you’ll get an idea of what kind of return you can expect. That said, nothing is guaranteed, so you’ll want to do additional research.
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Article content Vacation properties With the price of real estate in Canada being what it is, no one would blame you if you decided to look for a vacation property abroad instead of buying a home. Prices can be lower and the weather warmer in other parts of the world. However, before you start browsing online for that dream home, you need to decide if this vacation property is for pleasure or investing purposes. Of course, it can be both.
If you’re focusing more on it being an investment, you’ll want to make sure that it appeals to people on vacation. Things such as the location, amenities, and nearby restaurants will matter more to visitors than to someone who plans on living in it a few months a year.
Like a rental property, you need to factor in the maintenance costs and upkeep. For example, you might need to hire someone to manage your guests, or hire a maid to clean every time someone checks out.
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Article content The other consideration is funding your purchase. For those buying in the U.S., many Canadian banks offer cross-border mortgages. However, if you’re looking to buy in another country, you may need to fund your mortgage locally. That may be tricky if you don’t have a huge down payment or any ties to the country.
Consider all your options With house prices so high in many places, the reality is that owning your primary residence may not be possible right now. Fortunately, other real estate options are available here and abroad that may help you build some wealth, even if you can’t afford a house where you live.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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