Real estate investing 101: From home ownership to real estate funds

A principal residence is still the cornerstone for many Canadians. You gain a place to live, while building equity over time — not just through rising property value, but also through every mortgage payment you make. That’s because part of each payment goes toward reducing your loan balance, which increases your ownership stake in the home. In other words: you owe less, and you own more over time.

Tax benefits are significant too. In Canada, capital gains on your primary residence are generally exempt when you sell.

But the challenges are real: high down payments; carrying costs such as property tax, insurance and repairs; and exposure to local market swings. And taking on a mortgage means adding leverage. While you won’t face a margin call like in a brokerage account, the risks show up in subtler ways — such as higher payments if interest rates rise, or becoming “house poor” if too much of your income goes toward the home.

In a downturn, negative equity can also be a risk — that’s when your home’s market value drops below what you still owe on the mortgage. If you had to sell during that time, you could end up owing the lender money even after the sale.

For those able to buy beyond a primary home, rental properties can offer income plus long-term appreciation. Done well, net rental yield (annual rent after expenses, divided by property value) can provide steady cash flow. Leverage can also magnify returns if rents cover the costs, but it can just as easily amplify losses if expenses outpace income or property values decline. 

Being a landlord often isn’t passive. Financing risks increase when interest rates climb or mortgage rules tighten. Vacancy periods, repairs, and tenant issues can quickly eat into returns. And property is often illiquid — selling may take months and come with significant costs if you need to raise cash quickly.

This is where alternatives like Real Estate Investment Trusts (REITs) and real estate mutual funds and ETFs come in. These vehicles let investors pool their money to access large portfolios of properties that would be difficult to buy on your own — this is what it means to invest at scale. Instead of owning one rental unit, you might have exposure to dozens of office buildings, apartment complexes, or industrial parks.

REITs come in many flavours. Retail REITs depend on the health of shopping centres, industrial REITs can ride the logistics and e-commerce boom, and residential REITs follow rental demand and affordability trends. Some are now even riding the wave of the AI (artificial intelligence) boom — for example, industrial REITs that own data centres used to power cloud computing and artificial intelligence platforms.

Different types of REITS also behave differently. For example, industrial REITs may be more sensitive to the business cycle, while residential REITs — such as those focused on apartments or seniors’ residences — may be more cyclical. That allows investors to choose REITs that align with their risk tolerance or complement other real estate they already hold.

Real estate behaves differently from stocks or bonds. It tends to respond to economic cycles in unique ways, which is why many large institutional investors have long carved out about a 10% allocation to real estate³. Publicly traded REITs often behave like a hybrid between stocks and bonds — they can swing with market sentiment like equities, but the income they generate from rents can resemble the steady cash flow of fixed-income investments.

For individual investors, the right amount depends on your goals and current exposure. A homeowner may already be overweight real estate without realizing it, given how large their mortgage is compared to other assets. Others may prefer the liquidity and lower entry point of REITs. Some take a hybrid approach — using a primary residence as a base and adding indirect exposure through funds or REITs for balance.