Investor Watch: Investing in real estate
Housing prices in British Columbia, and particularly those in Metro Vancouver, have been on a steady rise for the past ten years, causing many people to look to real estate as an investment. However, like any other type of investment, housing prices can fall and there are other risks associated with investing in real estate. With this in mind, the British Columbia Securities Commission is issuing this Investor Watch to remind people to do their research before they make a real estate investment.
What is a real estate investment?
There are many types of real estate investments. Buying a rental property is a real estate investment that most people understand – a person buys a house or an apartment that they rent out to gain investment income over time. When a group of people invest together, or a company sells a stake in a rental property, the investment becomes more complex.
Some of these investments classify as securities, while others do not. The BCSC only has jurisdiction over transactions involving securities – an interest in pool of mortgages, an interest in a pool of properties, etc. This is one of the reasons why you need to take your time to assess a real estate investment. Whether you buy a contract from a developer, purchase securities in a company involved in real estate, or buy a property, you need to understand the risks and your legal rights.
What are real estate-based securities?
Real estate-based securities trade as public and private companies. For example, you can invest in a real estate investment trust (REIT) that trades on a stock exchange like the TSX, or you can buy shares in a property when a company raises money through a private placement. The Informed Investing section of our website details how different real estate investments are structured.
If you buy into a private placement, it is important to understand that you are largely on your own. This is because the company is raising capital through a series of private placement exemptions from the prospectus requirement. A private company using these exemptions is not required to give investors the same ongoing disclosure (financial statements or press releases) as a public company.
How are real estate-based securities sold?
You can purchase a REIT through a registered financial advisor, or on your own if you do direct investing. Since they trade on stock exchanges, you can buy and sell them in the same way you would do with shares of other public companies.
Private placements are generally sold without a prospectus (a formal document required by law when a company wants to sell shares to the public), and without the advice of a registered dealer. Sometimes companies sell these securities under an offering memorandum (OM), a document that provides information about the company and the investment. It’s important to remember that securities regulators do not review OMs before the investment is offered to the public.
What are the risks?
When real estate-based securities are distributed using exemptions, the risks are similar to those related to private companies.
There are also risks associated with the underlying real estate investment. First and foremost, you need to be aware that property values can go down. Additionally, there is the possibility that mortgage or rental payments will not be paid. Furthermore, developers sometimes run into problems – this could cause them to seek more capital, or they could go out of business altogether. All of these risks can affect the value of your investment and your expected returns.
Finally, if you are considering borrowing money to make the investment, you should know that you could be compounding your risk. If the deal goes bad, or if you don’t get the returns you expect right away, you will need to be able to pay back the loan with interest, and the borrowing costs.
What should you do before you invest in real estate?
Understand the risks associated with the investment. Be sure to do background checks on the developer and the person promoting the investment. Take the time to seek advice from someone independent of the investment, like a lawyer or a registered financial advisor.
You should make sure the investment matches up with your financial goals. The InvestRight Guides to Investing are free tools that can help you assess an investment, choose a financial advisor, and understand more about investing in private companies. You can download them from our website.
Who do you contact to ask questions about these type of investments?
The BC Securities Commission regulates the trading of real estate-based securities. Other real estate investments, like the purchase of a pre-sale apartment from a developer or the purchase of a property, generally fall under other provincial regulatory bodies such as those listed below.
If you’ve made a real estate investment, or are considering making one, and you don’t understand what it is, give the BCSC a call. Our inquiries staff can point you in the right direction. You should also call us immediately if you think an investment is a scam.
We can be reached at 604-899-6854 or toll-free at 1-800-373-6393. You can also e-mail us at [email protected].
Links to other resources
The Financial Institutions Commission: www.fic.gov.bc.ca
The Financial Institutions Commission (FICOM) is a regulatory agency of the provincial Ministry of Finance. FICOM is responsible for administering 10 statutes that regulate the pension, financial services and real estate sectors in British Columbia.
The Real Estate Council of British Columbia: www.recbc.ca
The Real Estate Council of British Columbia (RECBC) is a regulatory agency that is responsible for licensing real estate representatives, brokers and brokerages engaged in real estate sales, rental and strata property management. The RECBC also enforces entry qualifications, investigates complaints against licensees and imposes disciplinary sanctions under the Act.