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How to invest $40k in real estate

by Corben Grant on 07 Mar 2022

Everyone wants to grow their wealth and the real estate market is among one of the best ways to do so. Recently, we have been looking at different approaches to real estate investing, from how to invest with little or no money, to how to spend $1 million dollars across Canada. The important message of these articles is: you don't need to be wealthy to begin building wealth as a real estate investor. There is an opportunity for everyone when it comes to investing in real estate.

Though those previous stories looked at nearly opposite ends of the spectrum, today we are going to look at a more average investor's circumstances: How should I invest $40,000 in real estate?

Whether you have been saving for a long time or have come upon a sudden windfall of money, you don't want to spoil your opportunity. Poor financial decisions can cause you to lose $40k pretty fast while smart ones can see that your money grows far beyond your starting investment.

Let's take a look at some of your options.

Why real estate investing?

Buying real estate is a no-brainer in some instances, like if you need a home to live in. But from a pure investment perspective, why should you choose to use your $40k here as opposed to somewhere else? Well, there are many benefits to real estate investments that make them a very popular choice.

Low risk

When it comes to owning real estate, it is a very safe way to hold your money. In general, real estate holds value very well over a long period of time. This is due in part to the fact your asset is tied to a physical piece of land and the buildings on it.

Steady growth

Real estate markets in Canada have seen steady growth for decades. Now, obviously, anyone who tells you that the market always goes up should not be believed, but there are reasons to believe in the long-term growth potential of real estate.

One of the biggest reasons is that it simply remains incredibly useful. Especially in highly developed areas with scarce free land, your land holdings will always be desirable to somebody and will become more rare as cities expand.

Cash flow opportunities

One of the biggest appeals in real estate is the opportunity for cash flow. Though your asset can be worth a lot down the line as you pay down your loan and collect equity, you can also earn money in the short term through renting out a property you own. Renting can, at minimum, reduce some of the carrying costs of your property and, at best, can result in money straight into your pocket.

Equity

Your home's value can work for you even if you don't want to sell it. By utilizing your home equity, you can access a reliable line of credit or cash to use for other things such as home improvements or more investments.

Options

You can buy anything from a small condo to an office building – there are various markets all across the country to choose from. There are also a number of passive investment opportunities in real estate (more on this later) that can let you get into real estate even if you don't have the money for a down payment.

Buying a home

The first and most obvious choice of investing $40k is to buy a home. Obviously, this won't be enough for an entire property upfront, but in many areas, it will be enough for a down payment.

If you wanted to pay the minimum possible down payment on a home, you could be approved for a mortgage at a purchase price of around $650,000. In this case, the minimum down payment is about 6.15% due to the way down payments are calculated on homes above $500k.

At this down payment level, you will still be required to pay for mortgage insurance, which can be added to your mortgage principal, and you will also have to cover closing costs.

Though this price point would limit your options in very high-priced areas like Toronto and Vancouver, you could still afford a detached home in many other cities including other major cities like Calgary, Montreal, and Ottawa. Even in the more expensive areas, you won't be out of luck as you may be able to find condos in these areas for around your price range or slightly higher.

Saving for your down payment can be the hardest part of buying a home, so with $40,000 to spend you are already in a good position to achieve homeownership.

Once you own the home, you will obviously have to continue paying your monthly mortgage payments, however, you will also be benefiting from ownership of a real estate asset that can appreciate greatly in value, which can later be sold or used for a line of credit. You may also choose to buy a property as rental real estate, which can help you pay off your mortgage much more easily and generate cash flow.

Renovate your home

If you already own a home, you may be able to invest your $40k back into your home itself with renovations and improvements that can add to the value of your home.

There are many options you have in this regard, though some will have more investment benefits than others. For example, things like a bathroom remodel or building a new deck will only increase your property's values to a point and are the best choice if you plan to live in your home and enjoy the benefit of your new additions.

You could also choose to make cost-saving changes to your house such as a new efficient heating and cooling system or new windows. Again, these will not increase your home's value greatly, but they can help to save you money on bills which can add up in the long run.

Perhaps one of the best choices in this category would be to create a rental unit on your property. If you are already a rental property owner, you may opt to renovate this property instead. By creating a second unit in your existing home, you not only improve your home's value but also gain the ability to rent the space and collect rental income.

And, as an added benefit, newly built rental properties or a newly improved unit will be more appealing to tenants and you may be able to fetch higher than average rents.

If you have the space to spare, extra money from your property's rental income can take some of the burdens from your monthly payments and increase your disposable income. When you consider that rent in many areas in the country is well above $1,000 for a single bedroom space, you could see this renovation pay for itself within a few years.

Invest in a real estate fund or REIT

The final option to invest $40,000 in real estate would be to put it into passive real estate investments through a real estate fund or real estate investment trust (REIT).

Saving money is hard enough, but it's a whole other process to buy a home or renovate an existing one. The beauty of these options is that you take all the hassle out of real estate investing but still get to take advantage of the real estate market.

With a real estate fund or REIT, you invest money that is then used by a team of experts who build, buy, improve, and rent out properties to grow their portfolio value. Then, they pass on their returns and income to shareholders. These investment tools offer competitive returns to other options like stocks and are available at many different price levels.

Another great aspect is that you can be exposed to other segments of the market that would be much harder to invest in with only $40k, such as commercial properties. You can choose different real estate investment trusts that specialize in any number of different areas, or choose a general REIT that has a wide coverage for reliable and lower risk returns.

This can even help with the other options on our list. Say you want to buy a home but you are not in a rush and would like a little more of a mortgage than your $40k can get you. If you invest for a few years, you can easily grow your money and have more to work with. Naturally, however, this option will work best the more time you have to wait.

Conclusion

These options are only some of the many ways that you could choose to invest your money in real estate. No matter where you think is best for you to invest in real estate, you will most likely be able to grow your wealth with careful planning and wise investment choices. Have any more ideas for how to make your $40k go as far as possible? Share them in the comments to help other investors like yourself.



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