With 4 years of volatile interest rates and home prices, 2024 looks to be a good time for those that are financially positioned to make real estate part of their retirement portfolio, or add to it.

We saw a run up on home prices in ’20 and ’21, followed by the run up on rates in ’22 and ’23, making for a difficult time for real estate investment. Like the stock market, housing moves through cycles, and I believe we are entering a good time to buy. Including real estate in your retirement plan, can create a diverse foundation for a comfortable retirement.

Now, let’s dive in to why I think this is a great year to consider the addition.

For someone who has got some cash to invest, real estate can be a game-changer when it comes to building for your retirement.

Adding real estate into your existing portfolio is powerful a for a few reasons:

Diversification: helps reduce risk by spreading your investments across different classes, helping you navigate future economic fluctuations

Leverage: Speeds up your retirement preparation, as you borrow a large amount of the money needed to buy the property. You then pay it back over time with rent the property produces, and allows you to take advantage of the value appreciation over that time.

Options in retirement: Once you retire you have different ways you can use the property, which include: 

monthly income from rent, or lump sum cash either – tax free by borrowing against the property, or selling to property, paying tax and accessing the profit.

Inflation Hedge: Real estate can act as a hedge against inflation, as property values and rental income tend to rise with it.

Timing the market is near impossible, but the future of the housing market must look positive for investment to make sense.

There are multiple factors that make 2024 a unique time to add a property to your portfolio, which include:

Rents are up double-digits to record highs
Mortgage rates look to be coming down in 2024
Lower rates = increased demand and prices; other things equal
1M+ population growth fuels housing demand
No economist projecting serious unemployment issues
Years before builders are willing and able to deliver needed homes

With these indicators, it leads me to believe there is an opportunity to beat the crowd into the market to help build for your retirement.

When buying an investment property, there are many types to consider including; condos, single-family homes, multi-unit residential, and commercial properties. However, current conditions create a unique opportunity for single-family homes.

The number of households in continuing to grow in areas where there is above-average immigration settlement, such as GTA, which should continue to push rents up faster than inflation. As our economy slows, credit availability for buying assets tends to tighten, but mortgages for single-family homes will typically continue to flow, in fact we’ve seen rates fall as much as 1% in the last 90 days with further drops expected. Canada, and Toronto in particular has seen some of the highest increases to construction costs in the world during 2023, and a major shortage of labour in that market, which boosts the cost to build a new home, in turn increasing the values of existing homes. The combination of the above, and a move by developers to purpose-built rentals, a growing supply of condos, and a consumer preference to houses — the sweet spot seems to be single family homes.

In order to determine if this is the right type of investment for you, or the right time to get in, you also need to understand the current risks. It’s important to remember that uncertainty is what also creates the greatest opportunities. Here’s my top concerns:

Rates

Most buyers will return to the market before the Bank of Canada first cuts rates, once confidence of the economy returns and rate cuts are on the horizon. When rates cuts come is very hard to call, but the economy cannot sustain the current environment much longer. Rates coming down could lead to a bump in home prices; and a 5% bump to the average Canadian home price of $650,000 is $32,500. Conversely, paying a mortgage at 1% higher rate for a year will only cost you $5,075, and based on current projections you should be able to refinance a mortgage in 12 to 24 months at significantly better rates. This creates opportunity.

Cash Flow

With rates where they are, it’s almost impossible to find a rental property that will generate a positive cash flow with 20% down. Here’s the thing though, in strong markets that’s almost always been the case, even with rates in 1-2% range, with rents at the time, properties still weren’t cash flowing, and this trend probabaly doesn’t get any better over time. So investors need to be in a strong financial position to support the cash flow issues for a long period of time or bump the down payment to bring down mortgage payment, because the key to real estate investment is staying invested long term to get the value increase and the mortgage pay down working for you.

Threat of Recession

This is a risk to all investment classes, if we see a recession, values and returns tend to slow. However, when we look back at past recessions, Canadian Home prices on average have increased by 1.8% in value from the start of a recession to the end. Canada has also never gone through a recession with the long term supply and demand issue we have in our housing market today. Whether a recession is coming, and what it might look like is hard to call, but it’s about being in a position to weather that storm financially first, and second have your retirement strategy experience minimal impact to keep your retirement timeline on track.

You need to factor in all of the above when determining if now is the right time to get in, and you also need to consider if property investment is right for you. Owning a property is not the hands off investment a stock portfolio is, particularly with older homes that can have issues, and with rental laws that favour tenants — but with the right approach or adding a property manager you can find a good balance.

Despite all the risks noted above, there are a lot of ways to tip odds in your favour if you decide to get into the market. Here’s some things to factor in to your planning;

• Rates and mortgage product are important, make sure you seek independent, professional advice early in the process to ensure that side of the investment is optimized
• Look at communities where there is net positive migration, more people moving to then from. Look for job creation that is strong, rising employment and falling unemployment are the key factors to look at. A community that has strong affordability, and retirement and/or recreational appeal are great too.
• Avoid rent controlled properties if you can, that means stay away from B.C., Manitoba, New Brunswick, PEI and Quebec. Other provinces are ok, except Ontario if the home is built before Nov 15 2018, and Nova Scotia has limited to 5% annually until the end of 2025.
• Look for properties close to well rated school districts, they tend to appreciate in value better, and will be easier to rent.
• Buy near public transit, as it provides a rental premium, and should retain value better during a recession.
• Look for opportunities; a fixer-upper with good bones can really help boost value and rents. If costs to borrow the funds to complete the work are less than the rent increase you’ll get for improved property, you’ve got an opportunity.

Spending the time to identify what and where you want to buy, can really be the difference maker. Don’t forget, once you have the property, to spend equal time vetting your tenants, it can really be the difference in what your experience is as a landlord.

My hope is this provides you context to analyze if real estate would be a good addition to your retirement portfolio.

Start small by having conversations with family, or others you know that have gone down this path. Seek advice from a professional, to understand your options, and confirm you are financially positioned to take this step.

To summarize:

• Understand if adding real estate to your retirement portfolio is right for you
• Review current market conditions, and determine if this is a good time to take action
• Identify the right market for investment; currently I believe that is single family homes
• Identify concerns and risks, and make sure you are in a position financially to navigate those that come up
• Be savvy about identifying the right property and location to optimize your investment

I’d be happy to connect to provide you some advice based on your situation, and feedback based on my experience as a mortgage broker and a real estate investor myself.