Have you ever considered lending RRSP funds to a borrower?
According to a census conducted in 2016, 35% of Canadian households have chosen to use RRSPs as a method to save for retirement.
A Registered Retirement Savings Plan (RRSP) offers tax benefits that other accounts are not eligible to receive, and as a result, a RRSP tends to generate a better profit by the time it comes to make a withdrawal.
However, RRSPs are limited in their growth by the interest rates the banks administer to them and this may not reach the profit you had in mind.
For this reason, many RRSP holders choose to use their savings as an opportunity to capitalize on further profits.
While there are limitations to investment opportunities in which RRSPs are eligible for participation, there are options available to help with profit growth. Many investors choose to invest their RRSP savings further, and some of them look towards investment properties or real estate as one of these options.
The Canadian real estate market has been on a steady rise for years. With a steady economy and a respectable nationwide population growth, Canada is a worldwide hotspot. It’s a great opportunity for RRSP holders hoping to safely build their current savings.
While an RRSP account is ineligible to invest in investment properties directly, there is an option to circumvent these rules to get the most of your money. One of these options is to find a borrower.
A borrower is a landlord looking to borrow funds to invest in a local investment property. Many of these real estate investors struggle to find the necessary funds due to the strict lending criteria put out by the banks or because they haven’t balanced their investment strategy to their financing. This option is great for investors who are currently sitting on an RRSP account with more than $50,000 saved. While this method is often overlooked by investors, those that do can often see a return between 5% to 12% back on their cash investment.
Here are 7 steps to investing in real estate by lending RRSP funds
1. Find a Borrower
Heading down to a local real estate investors meeting is a great way to find borrowers. Introduce yourself as an RRSP lender who is looking for borrowers.
2. Appoint a Trustee
Choose a trustee you can trust. Asking for referrals from well-informed colleagues or at the local real estate investors meeting is a great place to start.
3. Open a Self Directed RSP Account
It’s important this account is self directed. A self directed RSP (Retirement Savings Plan) account will give you more freedom to choose nonconventional investments such as mortgages, or other conventional investments such as GICs and bonds. Not all self directed RSP accounts are created equal. Take the necessary time needed to shop around to get the account that best suits your immediate and future needs. These accounts can be RRSP, RESP, RRIF, LIRA, TFSA
4. Transfer the funds needed into the self directed account.
You may run into some opposition when trying to transfer funds into your self directed account, but stay strong. It is important to remain firm when talking to your financial advisor about this change in investment. The reason why you will face resistance is because they will no longer be making any money off your investments.
5. Investigate your Borrower
Ask for a credit check and check out their current real estate investments. These investments should be appraised and the current condition of the properties should be reviewed and possibly inspected. If you can, research the market area as well. You will be working closely with this individual for some time so remember a little digging could save you some unnecessary stress in the future.
6. Complete the Paperwork
The borrower, your lawyer, and trustee can guide you through this step. Be sure to cross all your T’s and dot your I’s.
7. Monitor your Investment
Monitor your investments and watch your retirement funds continue to grow tax free until you need to use them.
RRSPs and Real Estate Investing
An investment property is a business and like any other type of business, it is not a one size fits all opportunity. There are many things to consider such as the property’s annual net rate of return, if they are profitable, or if they are easy to manage. How much personal time and energy it will require should also be considered. A thorough investigation should be done to every property considered before any contract is signed and agreed upon. Knowing as much as possible about the various properties in consideration will help narrow down potential prospects, while keeping hidden and costly errors to a minimum. There is never a 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, there are options to help you move forward if your borrower stops making their scheduled payments. So long as a formal agreement has been arranged and set out in writing by yourself, your lawyer, trustee, and the borrower, you can take action to reclaim your investment.
Joining a local real estate investors meeting, like our very own Halton Real Estate Investors Group meeting, is a great way to help you get started if this is an option that appeals to you. Don’t be afraid to ask questions, get to know other investors, and before you know it, you could be one of them.