If you’re one of those people searching how to use RRSP to buy investment property you’ll want to read this.
More and more people are looking to invest in the Canadian real estate market and more and more are opting to use their Registered Retirement Savings Plans (RRSPs) as a means to do so. Investing your RRSP into real estate requires the right strategies to be in place but it can become a very lucrative opportunity for investors willing to put forth the effort.
While using RRSPs for investment properties is possible, it can only be done indirectly. Investment properties require a minimum of 20% down payment and this payment can only be contributed with non-registered funds. As most RRSPs are by nature registered, this disqualifies the RRSPs from the contributing source of the 20% investment for the down payment in any investment property.
However, this is not to say that this is the end of the line. For those looking into how to use RRSP to buy investment property there are a few indirect options for investing your RRSPs into real estate.
Here are the three most popular methods.
Real Estate Investment Trusts
One common method is investing RRSP savings into REITs. REITs, or Real Estate Investment Trusts, are corporations that own and manage a range of investments in mortgages and real estate properties. They work essentially like stocks and are open to the public. In the TSX (Toronto Stock Exchange) there are currently 50 Canadian REITs companies listed. REITs work by allowing investors to purchase multiple rental properties without being the risk of relying on a single investments successes. It’s a great way for investors to be involved in real estate, while allowing a team of experts to manage the properties themselves.
Mortgage Investment Corporations
MICs (Mortgage Investment Corporations) are investments and lending companies. They are made for one purpose, mortgage lending. MICs are the ones people turn to for mortgage loans when the traditional lenders, such as banks, credit unions, or large alternative lengers, deny them their loans. As a result their clients are considered to be higher risk and are often subjected to much higher interest rates, in some cases as high as 10%. To function, they fully rely on their investors to lend them the money they need so they can distribute mortgage loans to their clients.
MICs can be either publicly or privately traded and allow investors to invest in debt used to buy real estate. MICs qualify as investment opportunities for RRSPs under Canada’s Income Tax Act.
MICs are regulated by the federal regulator of financial institutions (the OSFI) and are not required to pay income tax thanks to their corporation structure. As required by the Income Tax Act, MICs cannot retain any of their earning and must distribute every penny back to their investors.The terms of lending are shorter for MICs than the terms required for banks, with most terms sitting between 6-12 months. Investors can usually expect to see around 2% back on their RRSP investments with MICs. This is a fantastic option for investors looking to invest in a shorter time period.
Lend Out Your RRSP Funds To Another Investor
This option is great for investors who are currently sitting on an RRSP account with more than $50,000 saved. This method is often overlooked by investors but with its almost guaranteed return sitting between 5% to 12% back on your cash investment, more investors are choosing to explore this option more openly.
Many real estate investors struggle to find the money they need to pour into their investments due to the strict lending criteria put out by the banks or they haven’t balanced their investment strategy to their financing. There is never any shortage of investors looking for greater cash flows and they are always looking for lenders to give them a hand.
Unlike when a stock dips or a mutual fund does poorly, you have options and alternatives to help you move forward if your borrower stops making their payments. So long as you have your formal agreement, set out in writing and agreed upon by yourself, your lawyer, trustee, and the borrower, you can take action to reclaim your investment. Most cities have local real estate investment meetings that attract borrowers and lenders from the area. We actually host our own monthly networking meeting for real estate investors in the Halton region. So if you want to rub elbows with active investors you should click here for more info on how to get on the invite list.
It is important that your RRSP funds are transferred into a self-directed RSP account before any withdrawals are made to avoid your funds becoming subjected to any unnecessary taxes or banking fees. You will most likely receive some resistance from your financial advisors when trying to move your funds because they will no longer be entitled to a share of the profits that your account generates. But you do have a say in how you use your RRSP investments.
There are many options when choosing investment opportunities to sink your RRSP into and it is also important to know how to best make use of the rules surrounding the funds in your RRSP to avoid being heavily taxed on your withdrawal. While there are rules that apply to every RRSP in Canada, there are some minor rules that may vary depending on the provider you use. Understanding these rules can help you avoid any unnecessary taxes or fees from being tagged onto your money.
Whether you are looking into a long or short term investment, these are some great options to help get started in using your RRSPs to invest in real estate. Explore what works best for you and watch your investment grow.