What if you could make money the way banks do? The banks know how to make money!
Interest rates have been at historic LOWS for many years now, and even still banks are making money! Many people don’t know this but we Canadians can “act as a bank”, and we have options available to us other than the mutual funds offered by financial planners; these Mutual funds and stocks are not the only investments that are RRSP eligible.
If you have funds being held in an underperforming RRSP, the below alternatives could be a good solution for you.
The concepts we are going to outline are Self-Directed RRSPs and holding private mortgages on real estate assets.
A mortgage can be held in a self-directed RRSP (or RRIF, RESP, or LIRA,) account. This is one of the largest untapped sources of securitized returns where you can make 6, 8, 10 or even 12% on your money, tax free, on cash you put in a self-directed RRSP.
That’s a hell of a lot better return than a GIC (making only 2-4% annually), but it’s also backed by a cashflowing asset that you have recourse on, and once your money is in your self directed account, it’s actually a fairly straightforward way to utilize those RRSP funds effectively; You get to “become the bank.”
Many real estate investors are challenged when accessing the capital needed from the banks, simply because they don’t fit the lenders more strict lending criteria. There are plenty of potential investors that would be happy to make use of your RRSP funds WHILE giving you a much better return than you’re making right now.
To make the deal even more secure, your funds are backed by a cashflowing asset (the property.) AND you have a say in the return you get. In most cases, your funds, or private mortgage, are registered right on to the property’s title (in the same way a bank does this), giving you legal interest and priority if something were to go sideways.
Unlike the stock market, when your stock drops or your mutual funds do poorly, you actually have recourse if your borrower stops making you payments or you aren’t making the return you were promised; You simply have more control.
We are not financial advisors or accountants, so please seek out the advice of professionals, but we thought we’d at least cover the most important steps to follow and HOW to lend out your RRSP funds to a real estate investor:
1. Find a Borrower
The easiest place to find someone looking to borrow RRSP funds for an investment property is to head on out to a local real estate investors meeting. At the meeting if there is an opportunity to stand up and introduce yourself, do that and let folks know that you’re an RRSP lender looking for borrower(s).
2. Choose a Trustee (like Olympia Trust or Community Trust.)
There are other trustee’s but these are the ones most recommended by peers + colleagues, and they are excellent.
3. Open a Self-Directed RSP Account: Can be RRSP, RESP, RRIF, LIRA, TFSA. Fund the account with the amount you want to have in the self directed fund.
**You ARE NOT cashing out the funds you currently hold in that account, you’re simply transferring it to yourself directed fund.
**Most Self-Directed RRSPs have an annual trustee fee or account fee. This fee is paid to the trustee to cover the administrative costs of overseeing the RRSP. In many cases, the trustee only makes income through these fees. Annual trustee fees range as low as $25 per year to $250 per year. In many cases, your financial institution may waive these fees under certain conditions.
4. Complete the Due Diligence.
Since you will be directing where or with whom your funds are invested, you will want to do some research on the projects or person who will be borrowing from you. Personally, I ask to see a credit report for the borrower, a recent property appraisal, or inspection report and relative sales comparables. Having someone who understands the area, it’s economics (population growth, employment situation, vacancy rates, housing market condition) would also be very beneficial during decision making. Each deal will require some paperwork; The borrower, a lawyer and your trustee should be able to walk you through this.
5. Watch your wealth and retirement funds grow tax free until you need to use them.
This all may seem out of left field for many. People aren’t educated about these paths to wealth in school or by the bank. In fact, the banks are the losers when investors take this route, as they lose the 3-4% they skim off for managing your mutual funds; you may even have some resistance to your move to self directed from these advisors!
There is a lot more to RRSP lending than this article covers. Your trustee will walk you through the steps.
This was just a quick overview and to let you to know it’s an option.
For those that may have skimmed, we are not financial advisors or accountants. We are sharing our experiences, so please seek out the advice of professionals.
Happy investing!