Is an income property right for you?

You have to appreciate that—unlike investing in stocks and bonds—this kind of investment isn’t passive. You’ll need to do your homework, stay on top of the real estate market, and master all the details of managing your property to get a good return, even if you hire someone else to do much of the day-to-day work. “It’s not hands-off,” says Don Campbell, author and senior research analyst at the Real Estate Investment Network, an educational and research company. “You’re in essence buying a small business.”

You also want to consider that you probably already have a big stake in the real estate market through the equity in your house. That may not matter much if you consider your home primarily a place to live and you don’t intend to sell it to realize your retirement objectives. But it can be a factor if you consider your home an investment you may need to cash out of at some point. In that case, if you buy a rental property—particularly in the same city—that means a lot of your wealth will be riding on real estate’s good fortune.

If holding real estate directly isn’t your thing, you do have a more passive alternative: buying units in real estate investment trusts (REITs). These have some clear advantages, says Michael Missaghie, portfolio manager with the Sentry REIT Fund, Canada’s largest REIT mutual fund. He points out that REITs are easy to buy and sell with low transaction costs (they trade like stocks). As well, you’re assured of professional management, and REITs provide a well-diversified real estate portfolio that you just don’t get if you buy one or two properties on your own. REITs may hold commercial or industrial properties, office buildings, apartments, shopping centres, hotels and the like.

On the other hand, Campbell says direct investing gives you more control, you save on fees if you have the skills to manage your assets yourself, and you can invest in residential market segments like six-plexes that are too small for REITs to touch.

Which gives you the best return? It depends what you compare. Interestingly, analysts Michael Smith and Matt Koskinen at Macquarie Capital Markets Canada did a head-to-head comparison last October of investing in apartment REITs versus condos. They first compared returns from investing in a Calgary condo to Alberta-focused Boardwalk REIT. Then they compared returns from investing in a Toronto condo to eastern Canada–focused CAP REIT. In both cases, they found the REIT investment came out ahead consistently in recent years.

Campbell reiterates the best direct real estate investments are in niche markets like small multiplex buildings rather than condos, and he avoids Toronto altogether. He contends you can generally make more money through direct investments “if you do it right.”