For many Canadian dentists, the ultimate goal goes beyond the practice – it’s about building wealth for a secure future. One of the most effective ways to achieve this is through real estate investing, a lucrative sector known for its wealth-generating potential. Here, we delve into five promising real estate investment strategies that can help Canadian dentists grow their wealth.
1. Rental Properties
This investment involves purchasing residential or commercial properties and renting them out to generate a steady cash flow. Over time, the property may also appreciate in value, providing an additional return if sold.
Pros: These provide a steady income stream from rents. Plus, you’ll likely enjoy capital appreciation as your property increases in value over time. Moreover, your tenant will pay down your mortgage, creating additional equity.
Cons: This approach requires a substantial initial investment and ongoing property management. Plus, maintenance costs, problematic tenants, and potential property vacancies.
Tax Implications: Rental income is taxable, but you can claim expenses like mortgage interest, repairs, insurance, and property taxes to reduce the tax amount. If you sell the property for a profit, you will also be subject to capital gains tax.
Financing: All Canadian banks provide attractive and flexible financing options for investment properties. However, they require a minimum down payment of 20% of the purchase price.
2. Flipping
This strategy involves purchasing undervalued properties, renovating them, and reselling them at a profit. The idea is to add value through improvements and market it to potential buyers.
Pros: With the right property and effective renovations, house flipping can yield substantial profits in a relatively short period.
Cons: This is a high-risk, high-reward strategy. It requires a significant understanding of the real estate market, renovation costs, and timing. Unexpected renovation costs or a sudden downturn in the market could eat into your profits.
Tax Implications: The CRA treats profits from house flipping as business income. This means you’ll be taxed at your marginal tax rate, and you cannot claim the capital gains exemption.
Financing: Many Canadian lenders offer financing for house flipping, with shorter term lengths and no pre-payment penalties, but these loans often have higher interest rates than traditional mortgages.
3. Assignments (Wholesaling)
The idea is to find underpriced properties, secure a contract with the owner and then sell this contract to an investor. Essentially, you’re the intermediary between the seller and the buyer, making a profit from the contract’s sale.
Pros: Wholesaling doesn’t require a large amount of capital or excellent credit standing. It’s also a relatively quick way to turn a profit and doesn’t involve managing or maintaining properties.
Cons: This method demands a comprehensive understanding of the real estate market and strong networking skills to find buyers for your contracts. If you’re unable to find a buyer before the contract expires, you will likely have to “close” on the property and take ownership.
Tax Implications: In Canada, profits from wholesaling are generally treated as business income and taxed at your marginal tax rate.
Financing: Since you’re selling contracts rather than buying properties, wholesaling usually doesn’t require any financing. It would only require financing if you are unable to find a buyer and are forced to close on the property.
4. Land Investments
Land investing involves purchasing raw or undeveloped land in the expectation that its value will increase, particularly in areas of projected growth. Some investors may develop the land rather than sell it, improving it by building houses or commercial spaces.
Pros: The potential for high returns is significant, especially in rapidly growing areas. Plus, you can hold the property and earn rental income from the development.
Cons: Land investments require substantial capital and typically involve a longer time horizon compared to other strategies. Property development also involves navigating zoning laws, construction costs, and potential environmental issues.
Tax Implications: The CRA may treat profits from land development as business income, which means you’ll pay tax at your marginal tax rate.
Financing: Financing raw land or large-scale development projects can be more challenging. Due to their inherent risk, these projects often require significant down payments and higher interest rates.
5. Real Estate Investment Trusts (REITs)
REITs are corporations that own or finance income-producing real estate. When you invest in a REIT, you’re buying shares of the corporation and, thus, indirectly investing in the properties they own or finance.
Pros: REITs provide a regular income stream, diversification, the potential for long-term capital appreciation, and offer a truly passive real estate investment opportunity. They’re also traded on the stock exchange, making them highly liquid compared to physical properties.
Cons: As with any stock, REIT shares can be volatile, meaning the value of your investment can go down as well as up. Also, because they’re required to distribute most of their taxable income to shareholders, they may have less cash on hand to handle unexpected costs or opportunities.
Tax Implications: In Canada, REITs are obligated to distribute most of their taxable income to shareholders, which is then taxed as regular income. Unlike dividends, these distributions do not qualify for the federal dividend tax credit. Moreover, REITs can be held in tax-advantaged accounts like the FHSA, TFSA, and RRSP.
Financing: Since REITs are traded on the stock exchange, you can purchase them using a regular brokerage account, making them accessible and easy to invest in. Nonetheless, as with all stocks, you can take a loan to invest or even take a loan against your existing portfolio.
Conclusion
Investing in real estate can be a fantastic way for Canadian dentists to grow their wealth. However, each strategy carries its unique risks and challenges, so it’s crucial to research thoroughly and consider your financial goals, time commitment, and risk tolerance. As always, it’s best to consult with a financial planner and real estate professional before making any real estate investment decisions.
About the Author
Gurtej Varn, BA, CFP®, CLU®, is Canada’s leading Wealth Advisor for Dentists. Named Canada’s top wealth professional under 40 for 2023, Gurtej is also the host of “The Dollars & Doctors Show” and the founder of White Coat Financial Inc., a full-service private wealth advisory firm for Dentists.