If the question you have is not addressed here, email us and in 48 hours we will have a response for you.
RRSP Mortgages
- What Is RRSP Mortgage Investing?
- Who qualifies as a potential RRSP investor/lender?
- What are the "Rules of Engagement"?
- What kind of properties can RRSP's invest in?
- What steps are involved in getting it going?
- What are the 'roles' of some of the parties involved?
- Are there fees involved? What can I expect?
- What if I have a question that is not covered here?
- How do I know what is a good property and what is not a good property to invest my RRSP monies into?
- What kind of "Real Estate Definitions, Terms, or Phrases" must I know about?
- How do I go about finding out where I can locate properties to place my RRSP monies on to?
- Are there any RRSP investor/lending "Rules of Thumb"?
- Does this just work with RRSP money, or can I use cash for this kind of investing?
RRSP Mortgages
Q. What Is RRSP Mortgage Investing?
A. Quite simply what R.R.S.P. investing is about, is holding real estate mortgages as investment vehicles under the umbrella of your R.R.S.P. account.
Look at your R.R.S.P. as a separate and distinct individual. Traditionally, the thing that has been done with RRSP plans is that they were placed in some kind of mutual fund or stock fund based instrument that was placed by a financial brokerage firm, in exchange for a return, usually measured in return, and the success of the return was based on the astuteness of a fund handler, who took that pool of money and loaned it out to some venture or project of sort, that you sort of knew where it was (in global funds, in insurance funds, or coffee beans, orange juice …..???). Now I know that there are regulations etc. as to how your money is to be placed etc within that “game”, but as recent history has shown, it seems not to matter as much with respect to the bottom line return into your account. (Mr. or Mrs. RRSP Planholder).
One of the vehicles that is an eligible vehicle for your RRSP moneys to be invested in, is real estate mortgages. (refer to CCRA bulletin on eligible "Qualified Investments" withn your RRSP).
That being said, your RRSP is able to hold mortgages on real property, and get a return paid to it in the form of interest payments. Your RRSP is performing just like a bank does.
..or another way..
You loan money out to a borrower, and they agree to pay you interest on the money, and they pay back the money at an agreed upon time down the road. As security for the loan, a mortgage is registered against the property so your RRSP monies are protected.
Top
Q. Who qualifies as a potential RRSP investor/lender?
A. There are 3 basic categories of people qualified to participate in this way. They are:
• Current RRSP Account Holders
(have their RRSP account somewhere already)
• New RRSP Account Holders
(have cash to put into their RRSP)
• Those with RRSP Contribution Room
(have not made contributions, but have ‘credits’ that are accumulated – see tax return)
Top
Q. What are the "Rules of Engagement"?
A. The potential RRSP investor/lender must also be, what is called, at ‘Arms-length’ from the transaction or the parties involved. (Reference Section 251 and 252 of the Income Tax Act) Namely, the RRSP lender planholder CANNOT be:
• Related by blood, marriage, or adoption to the borrower.
• If the borrower is a company, the planholder CANNOT own a controlling interest in the property.
• If the borrower is a company, the planholder CANNOT be related by blood, marriage, or adoption to any of the individuals who own a controlling interest in the company.
The planholder will also likely be required to sign a statement acknowledging that the palnholder is satisfied that the investment meets the criteria of CCRA and all applicable tax and legislation requirements. I would suggest that in order for someone to be able to sign such a declaration, they will have sought out the opinion of professional advisors in a real estate lawyer, and accountant.
Top
Q. What kind of properties can RRSP's invest in?
A. Mortgages must be placed on “Real Property” that is, residential or commercial property located in Canada registered at a Land Titles Office. Some property types such as mobile homes, boats, leasehold land, co-ops and the like, (typically called Chattel Mortgages) are NOT eligible to be a qualifying investment under the Income Tax Act. ‘Agreements For Sale’ also do not qualify.
And, the mortgagee (lender) and mortgagor (borrower) must be “at arms length” as described above.
Top
Q. What steps are involved in getting it going?
A. After reviewing a potential RRSP investment lender’s current situation, via the interview information gathering process, and after they have reviewed your proposal with their team of advisors and are ready to go, the next 7 simple steps are all that is required. The steps are:
1. Open an Self-Directed RRSP account that MUST be able to deal in “Arms-length mortgages
2. Put contribution in place or transfer funds
3. Prepare instructions to place mortgage Including (independent legal advice letter)
4. Wait for the funds to be forwarded to the lawyer
5. Register the mortgage and close on the property
6. Watch monthly cheques / returns go into your account
7. Repeat the process.
Producing consistent, predictable RRSP returns through this Self Directed RRSP strategy allows investors the opportunity to take advantage of superior tax sheltered R.O.I. results, and cash in on the Alberta real estate boom. They get a great return on a great property and you get the property! Win/Win ..wooohooo!
Top
Q. What are the 'roles' of some of the parties involved?
A. There are several players in a transaction each with various duties and responsibilities to play and are basically as follows (but not limited to):
Real Estate Investor/Entrepreneur (and Team):
This is you. You find the deals and construct the deals to buy with cash, and mortgage funding (first and second mortgages) As the engineer of the deal, you must make sure that the other parties have ALL information on all the deal aspects that would be required for them to make a sound, informed, and intelligent decision. Typically, you are setting up the details of the mortgage with respect to term, interest rate, and payments schedule, for the RRSP planholder investor/lender to consider and then mutually agree to.
RRSP Planholder Investor/lender (and Team):
Typically, this is a person disgruntled with the status quo mutual fund and stock based funds for RRSP investing, and their lack of performance. They want to take control of their RRSP portfolio, and will educate themselves, and take on the action and responsibility as the CEO of their retirement future. They will have a team of professional advisors in their corner for advice and consultation in handling their affairs.
Trustee:
The Trustee is a financial institution that is set up as a stakeholder for the planholders RRSP monies and their account. They accept the payments, monitor the regularity of them and report to the planholder. They DO NOT chase for the payments, nor do they ascertain the borrowers suitability, or the suitability of the investment with respect to equity coverage ratios and the like. That is to be for the professional team to advise on. They also co-ordinate, with the input and instruction of the planholder, the settin up of the account including any movement of funds being held with other institutions or brokerage houses.
Top
Q. Are there fees involved? What can I expect?
A. Yes, like everything, there are fees involved with getting this going. But, unlike most vehicles, the payments can be taken care of in your deal by simply building them in. If there is cash involved for the setting up portion, PAY IT! Don’t pass these fees on to the RRSP planholder investor/lender, as you should look upon them as the cost of doing business. Besides, as a borrower, you should expect to cover the costs to set up the mortgage. Consider this: One of your competition’s biggest argument to dissuade a potential RRSP investor/lender from getting involved will be the fees are too expensive. By agreeing to pay those (carry them as costs to close in your deal now ..don’t forget) you have shot down that argument cold!!
(The costs to setup the RRSP, account, however should be borne by the planholder alone. It will run about $100-$125)
Other trustee costs will be:
Setting up the Mortgage $ 125
Execution of documents $ 50
Mortgage renewal $ 50
NSF Payments $ 30
Mortgage Discharge $ 50
Note that the fee schedule is a bit different with each trustee as they each have their own Fee Schedules and Criterias. Check with each one to understand the differences.
Top
Q. What if I have a question that is not covered here?
A. Simply email your question, and allow 48 hours for the response. More common questions will be added to the FAQ section for the benefit of all.
Top
Q. How do I know what is a good property and what is not a good property to invest my RRSP monies into?
A. Refer to the downloadable "Forms" section of the website and look for the "Astute Investors Checklist"
It will outline how to evaluate the RRSP mortgage, the subject property, and more importantly, the borrower.
Top
Q. What kind of "Real Estate Definitions, Terms, or Phrases" must I know about?
A. Refer to the "forms" section of the website for the "RRSP Real Estate Lexicon" to download for review.
Top
Q. How do I go about finding out where I can locate properties to place my RRSP monies on to?
A. You can either contact, our offic es to discuss opportunities that we might have available, or as a member, you can post it on the "Members Classifieds" section of the website, or both.
Top
Q. Are there any RRSP investor/lending "Rules of Thumb"?
A. Out of all the questions I get asked about, this area is the most talked about and batted about. What interest rate should I offer or expect to pay for an RRSP 2nd mortgage. The answer is not so cut and dried, but in the end, it comes down to what you two are comfortable with, decide upon, and on what the RRSP investor/lenders professional team advise him/her to do. A more aggressive RRSP investor/lender may favour the greater return potential of the equity participation, but THEY have the responsibility to more due diligence to make that call or choose that option. (Don’t forget the “Independent Legal Advice” letters, particularly with these kind of mortgages)
To hone in on the zone, the following items are to be considered:
What is the Loan To Value ratio
What is the track record and strength of the people involved
What is the property and it’s area all about
Find out what the –“in-the-street” market value of mortgages are.
Select a baseline of comparison, like the 5 year posted rate and work from there
(as you know this will fluctuate with economic conditions at the time of comparison)
Consider also, that in an “insured mortgage” situation with higher LTV, there is a stricter lending criteria and it comes with high fees that could be of $3000-$4000 or so depending on the property and it’s cash flow numbers.
Top
Q. Does this just work with RRSP money, or can I use cash for this kind of investing?
A. You can absolutely use cash to invest in mortgages, or you could learn how to invest in real estate yourself (we have some home study materials and live event info in our "RRSP Store" Section of the website), or with a partner using Joint Venturing.
Some of my associates, and me included, are very successful using joint ventures to invest and own real estate with.
Top
