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Understanding real estate investments

Real estate can be one of the best ways to build long term wealth.

As investors, we must be aware of the potential benefits and consequences of an investment. There are numerous potential benefits of real estate investing, such as tax breaks, financial stability, appreciation, and storage of wealth.

With many investment choices available, real estate is just one of our options to build long-term value. Real estate is unique, and in certain areas, exclusivity and lack of additional space to build has driven prices higher. For example, prices for a Banana island apartment in the last decade have risen faster than stocks or gold.

5 types of real estate investments

  1. Real estate investment trusts

A real estate investment trust (REIT) invests in income-producing real estate properties, such as shopping malls or multi-unit residential buildings. An investment in a REIT can offer investors income through payouts it receives from the properties it has invested in.

Investors can buy securities in public or private REITs. Public REITs are listed on a stock exchange and private REITs are traded in the exempt market. Buying and selling public REIT securities through an exchange is relatively straightforward, and its value is easily assessed through publicly- available prices. Private REITs are not listed on an exchange, making their securities more difficult to value and trade. Investing in a private REIT is different from and generally riskier than investing in a public REIT. There are also certain eligibility requirements that investors must meet before they can buy securities in a private REIT.

Generally, securities sold to the public in Ontario must be offered under a prospectus (a document that provides detailed information about the security and the company offering it), but there are some exceptions to this rule. For example, in Ontario, if a private REIT is looking to raise money from investors, they may be able to sell under a prospectus exemption in the exempt market. Learn more about how the exempt market works.

  1. Real estate limited partnerships

A real estate limited partnership (LP) is commonly used to develop a real estate property or to manage completed real estate properties, such as a condominium building. As an investor, you can buy securities in real estate LPs. Real estate LPs are governed by the terms of a limited partnership agreement, which may be complex. The LP is controlled by a general partner who manages the development of a real estate property. For example, the general partner may use money from investors to buy undeveloped land with the expectation of developing it or selling it at a profit. This gives investors the potential for growth if and when the land or development project goes up in value.

  1. Mortgage investment entity

A mortgage investment entity (MIE), also commonly referred to as a mortgage pool or mortgage investment corporation, is a mortgage financing business that pools money raised from investors to lend to borrowers.

MIEs will often provide financing or mortgages to borrowers who may not be able to obtain a loan from conventional sources, such as a bank. Borrowers typically use this financing to purchase single-family residences, commercial properties or development projects. A MIE will often hold a number of mortgages in its portfolio, reducing the potential risk to investors compared to holding a single mortgage.

As an investor, you purchase a security issued by the MIE (e.g. shares of a corporation, limited partnership units, trust units). The security’s value is derived from the value of the underlying pool of mortgages that are typically secured by the real estate properties. Investors have the chance to earn income (such as dividends) from the interest earned by the MIE on its portfolio of mortgages.

  1. Syndicated mortgage investments

In Nigeria, only mortgage brokers and agents licensed can engage in syndicated mortgage transactions on behalf of a brokerage, and only licensed mortgage brokers (not agents) can sign the required investor/lender disclosure statement forms. You can check that the individual or business is licensed.

A syndicated mortgage is where two or more individuals invest into a single mortgage against real property. Some syndicated mortgage investments are used to fund large scale real estate development projects. Before investing in a syndicated mortgage.

  1. Real property

You can buy a property as an investment and generate income through rental payments from a tenant, assuming that you charge enough rent to cover all costs associated with ownership, including any mortgages, taxes, utilities and maintenance.

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