An educational guide so you can invest in real estate in Canada with confidence.
Real Estate, in Canada, is an asset class like no other. Many households have exposure to it already, through ownership of their principal residence. Historically, Canadian real estate has been an extremely attractive investment, due to:
- Strong fundamentals: Canadian real estate has been appreciating for two decades for a reason. Canada’s population continues to grow, due to both natural increase and a strong, cross-country commitment to immigration. This population growth comes with an increased demand for housing – one that has not been matched with enough new construction to see prices fall. As long as this policy regime remains in place, Canadian real estate is likely to continue to outperform.
- Low correlation: Most investors know the value of diversification. But in the modern era, diversification means getting beyond purchasing stocks and bonds from various sectors. True diversification means leaving the public markets altogether and investing in assets whose value is unrelated to the direction of the TSX or S&P500.
Real Estate is one such asset. Capital appreciation is likely to occur due to the fundamentals of population and housing demand. And since tenants pay rent irrespective of the direction of the market, investors who invest in real estate may enjoy strong cash flows.
- Tangibility and Accessibility: Unlike other alternative investments, like hedge funds or cryptocurrencies, real estate is simple, approachable, and understandable. The value of physical real estate is something everyone has experienced in day-to-day life: the need to make a monthly rental or mortgage payment. It is therefore the perfect fit for an investor looking to improve their portfolio’s performance.
The types of real estate investment
Real estate investment – whether residential, commercial, or industrial – can be achieved in multiple ways.
Direct ownership
A form of investment where the investor owns the building outright, in their own name. This form of investment was once much more common: in decades past, professionals and other wealthy people looking to diversify would simply buy single condos, townhouses, duplexes or apartment buildings themselves.
This form of investment has advantages. It is simple, and it does not involve any management costs.
However, there are also disadvantages:
- It’s hard to diversify: Single properties can be extremely expensive, with their value projected to rise even further due to Canada’s strong fundamentals. Investors who wish to both own real estate directly and diversify their allocation to the asset class would have to purchase multiple properties. This limits diversified direct ownership to a select class of extremely wealthy investors.
- It’s hard to manage: An investor who owns a building is more than an investor - they’re a landlord. This means they have legal responsibilities for the maintenance and upkeep of their building, as well as the responsibility to keep it tenanted.
Investors can act as landlords themselves, but then they do not enjoy the advantages of professional property management, which may mean lower cash flows. They can also outsource property management, but this comes at a cost and will reduce that investor’s return.
Pooled ownership
This is an approach to real estate investment where multiple investors pool their funds to acquire a portfolio of properties. This is the approach taken by investors in Real Estate Investment Trusts (REITs).
Pooled ownership has several advantages over direct ownership. It enables the investor to diversify across multiple properties, reducing portfolio risk. It also allows the investor to experience the benefits of professional property management, like ensuring that costs are contained, ensuring that properties are maintained, and helping rents mark to market much more frequently.
There are also downsides. A pooled approach means that an investor cannot select an individual property or development that fits their investment objectives, or that they believe will outperform.
Like all investment funds, pooled real estate investment approaches usually involve fees, which lower the investor’s overall return. These fees not only support professional property management, which may confer benefits and convenience, but also the management of the fund itself.
Fractional ownership
Fractional ownership is a pooled approach to ownership of a single property. This approach allows the investor to own a portion of a single property. This can look like simply owning a fraction of an apartment or a condo and enjoying a fraction of the capital appreciation and cash flow that may stem from that investment.
But it can also look like purchasing equity in a development deal - like the direct deals listen on our platform listed on our platform. This is a type of “fractional” ownership that confers substantial benefits over other types. In many ways, it is similar to other types of equity investment - it is an ownership stake in the entity that manages the development of a real asset, and so investors may enjoy substantially more capital appreciation than other types of real estate investment.
This is a type of investment that was previously only available to institutional players, or very high net worth individuals. At Parvis, our mission is to take down those barriers, and make investment available to a broader pool of investors.
Investors who take this approach can select an individual property that meets their investment objectives and risk tolerance. By owning several ‘fractions’ of a property, an investor can also diversify their portfolio of real estate assets, even if they cannot afford to purchase multiple properties.
These are all forms of investment in property. But there are other forms of real estate investment. Take, for example, a Mortgage Investment Corporation (MIC).
A MIC, like a REIT, is a type of pooled fund. But where REITs allow an investor to invest in multiple physical properties, a MIC allows an investor to invest in mortgages.
Specifically, a MIC is an investment fund that issues private mortgages. Many borrowers, for different reasons, do not qualify for a traditional mortgage, and therefore seek out mortgages from private lenders. These reasons do not necessarily have anything to do with their ability to service their debt. They may be new to Canada and have an insufficient credit score, or they may be self-employed or a small businessperson.
MICs, as a form of investment in debt, have characteristics that REITs do not have. The mortgages that MICs issue are secured loans, and do not face many of the risks that physical properties do. But they also have less upside: REITs can directly improve the physical assets they own, whereas MICs cannot.
Public or Private?
An investor looking to allocate to real estate must answer the question: do they wish to invest in public assets, in private assets, or in a mix of both?
Each has advantages and disadvantages.
Public assets are assets traded on public exchanges. It is possible to allocate to real estate on public markets, as several prominent REITs – like the Canadian Apartment Properties REIT (CAPREIT) – are listed on the TSX.
These REITs allow the investor to enjoy both capital appreciation and cash flow. It is also very simple to invest in them, as any investor with a self-directed investment account can purchase shares by themselves.
As they are listed on public exchanges, they are also very liquid - they can be bought and sold in an instant, often through convenient, self-directed investment platforms.
However, because they are traded on public markets, the value of publicly listed real estate assets is not as uncorrelated as the value of private assets. Investors looking for shelter from volatile public markets, or who hold listed assets and are looking for a true diversifier to add to their portfolio, would be well-served looking to private markets.
Private assets are assets that are not listed on public markets. They can include both direct investment in a property and investment in an unlisted REIT.
Private real estate assets enjoy many advantages over public real estate assets, but their biggest advantage is that they are completely untethered to the market. They are a true diversifier.
Traditionally, however, there are many barriers to investing in private assets. First and foremost, investment in private assets generally requires one to be an accredited investor, which means they must have a high income, a high net worth, or both. (To learn more, read our guide on Everything you need to know about being an accredited investor in Canada)
While no institution provides this “accreditation”, investment funds must confirm that their investors meet the definition of an accredited investor through their Know-Your-Customer (KYC) process. This means additional steps, compared to the seamless transactions possible on the public markets.
The institutions and firms that deal in private real estate assets must also be registered with the Investment Industry Regulatory Organization of Canada (IIROC), or be a registered Exempt Market Dealer.
These regulations serve to ensure that only accredited investors can access alternatives, which carry great benefits, but also require a degree of sophistication over and above the typical retail investor.
Investment in private markets can be complex, and requires additional steps to complete, including back and forth with middlemen, and a lot of paperwork.
At Parvis, our mission is to break down those barriers.
Our platform allows frictionless access to information about the performance of your investments, at any time. Browsing projects, monitoring their performance, getting access to key information and investing is all extremely simple. Transparent, paperless, accessible anywhere - just like a self-directed investment platform.
As an Exempt Market Dealer, we are fully qualified to help accredited investors allocate their capital to private real estate assets. If you are interested in investing in private markets, reach out, and we can help guide you through the process.
Staying Liquid
All investors, not just investors in real estate, must ensure that their portfolio meets their liquidity needs. This is especially true of non-institutional private investors, – for as the proverb goes, “life comes at you fast”, and an investor may need to access their capital when life circumstances change.
However, it is important to note that it is not necessary to have an entire portfolio allocated to liquid assets. Investors who move from a “60/40” portfolio allocation – that is, 60% stocks, 40% bonds – to a 50/30/20 allocation, where the 20% is alternatives, including real estate – still have 80% of their portfolio allocated to liquid assets.
Real estate assets come with varying degrees of liquidity. Public assets, as they are listed on the public markets, are very liquid, and can be bought and sold near-instantaneously.
Private assets, however, are more complicated. Units that are owned outright must be sold outright if the investor wishes to access their value. Private real estate investment funds often only have periodic liquidity – e.g., the investor can only redeem their investment at certain points in time, whether it is monthly, quarterly, yearly, or even multiple years, as required by the common five-year hold period.
Investors wishing to invest in private funds should examine the funds carefully, to ensure that the liquidity offered by the fund is matched by the liquidity of the underlying assets. Where there is a liquidity mismatch, the investor runs the risk of being unable to access their capital.
At Parvis, we work to provide real estate investors with liquidity that is unmatched anywhere else on the market. Our proprietary secondary market allows users to trade fractional investments like stocks – ensuring that capital can be accessed much more frequently during secondary market events.
Enhancing the real estate investing experience
This market can be complex. And investment in private assets is not a step to be taken by inexperienced investors.
But sophisticated investors, at present, must deal with bureaucracy, hurdles, and complicated processes to enjoy the benefits of real estate in their portfolio.
Parvis is working to change that with:
- An enhanced user experience that brings the self-directed investment experience to private assets
- Data and analytics providing insights into investment performance, as better data leads to better decisions
- Increased access to institutional-grade investment opportunities at opportune moments – allowing sophisticated accredited investors to invest at rates previously only available to a select few players
- Expert insights to help make the most of your capital allocation
Real assets – real value
Real estate, and private real estate in particular, is an excellent diversifier. Any investor would be wise to include an allocation to it in their portfolio.
But investment in private real estate can be cumbersome and inaccessible.
We are working to change that. To discover how easy it can be to master Real Estate investing in Canada, sign up for Parvis today.
