Today I want to share something that a lot of people don’t know much about. It’s something that I didn’t know anything about until getting into the real estate investing world, but I feel its something everyone should know!
It is the options to invest your RRSP funds in real estate. You have other options besides mutual funds and stocks! Options that may be more buffered by the ups and downs of the public market!
[Fun fact: the Canadian Pension Fund is investing in real estate more and more; in 2005, they were 0.4% in real estate, and by 2018, they were 46% in real estate.]
I will use the term RRSP’s, but this also applies to money in other registered accounts like TFSA’s, LIRA’s, etc.
WHY NOW?
I feel this is important to talk about this now due to the recent downturn in the market. You might be wondering if there is something better to put your RRSPs into. Secondly, I just finished going through the entire process myself of cashing out my mutual funds and investing it in real estate assets.
I WAS JUST LIKE MOST
Most people invest their RRSP funds in mutual funds or stocks, and hand it over to someone else to manage. That was me. When I first started working, I opened a retirement RRSP account through work. It was the typical group retirement account and a mutual fund manager looked after it.
I selected my risk tolerance and timeline and hoped for the best. Well, that didn’t work out so well. The account grew very slowly over 5 years. The returns were ok some years, but not others. I’d have 6% one year, but then -4% another year.
I also knew that no matter my returns, the manager was getting their cut. Typical fees are 2%. That may not sound like much, but if your return is 6% and the fee is 2%, you are left with a 4% return! That’s 30% of your profit going to the manager.
Mutual fund managers might be limited in what they can invest your money in, as their institution may only offer certain products. They also could be bias towards certain investments based on what they make for commission.
Mainly, its just bothered me for a long time that I didn’t know what I was invested in. This year I took control of it and made a change. You simply don’t get wealthy when you give up the control of your investments to someone else.
YOU HAVE OTHER OPTIONS…BUT FIRST…
RRSP funds can be invested in a variety of things, including the real estate market. It depends what exactly your investing in, but generally, real estate is less affected by the ups and downs of the stock market.
However, you can’t have access to these other options unless you transfer your money from a managed account into a self-directed RRSP account. A self-directed account has no professional advice (you do your own research and due diligence), flat fees, and most importantly, more investing options. Often the options have higher returns, but not always – you must do your own due diligence. I feel its worth putting in a little effort for better returns.
That’s what I did first. I opened an account online with Olympia Trust (there are other institutions that do the same thing), and transferred in my RRSP funds by filling out an online form. It was quite easy. There are no tax consequences for transferring funds like this from one RRSP account to another.
I learned that it is important to follow up and make sure your current RRSP institution receives the form. For me, the form never went through, and I didn’t know this until weeks later. I could have cashed out my mutual funds in February, before COVID-19 affected the markets, but instead the transfer ended up happening in early March, as the market was already going down. Luckily, I didn’t lose too much!
NOW WHAT EXACTLY CAN YOU INVEST IN?
Once in the self-directed account, what are some of your options? You can invest in several different REITs (Real Estate Investment Trusts), MICs (mortgage investment corporations), Private Real Estate Funds, Private Debt Funds… there are many different institutions that accept RRSP funds.
Another popular option is to lend it out as a private mortgage. You would work with a competent mortgage broker (or could do it privately) and lend your money to someone who needs a mortgage. You are acting as the bank and are paid based on the agreed rate and terms. Banks make a lot of money on mortgages and you can too. It’s like a private loan secure by a piece of real estate, and mortgage paperwork is drawn up just like a regular mortgage, but you have the say in how you qualify your borrower. The returns for these types of mortgages can be around 8-10%. Often people will say it has to be “arm’s length”, meaning you can’t loan to yourself or a family member. However, I learned that you actually can lend to yourself, but often the restrictions, fees, and taxes, doesn’t make it worthwhile. It’s much more common to do arm’s length mortgages.
WHAT DID I CHOOSE?
I knew I wanted to invest in one option offered by Triview Capital Ltd., called the TVC Private Real Estate Trust. They pool funds together and then invest it in a variety of real estate assets including US multifamily, self storage, mobile home parks, car washes, and student rentals. For US multifamily, I knew they invest into projects managed by Western Wealth Capital, who I’ve been following for a while and know they have a really good track record. The minimum investment is only $10,000, which worked well for me. I also liked that I was going to be invested in several different properties, and not just one project/property.
Even with a self-directed account, many options are still limited to high net worth people and institutional investors; however, a fund like Triview makes it accessible for people like you and me, which they call retail investors.
In order to invest in the Trust, there was some paperwork to read and fill out, but overall, it was a pretty easy process. It was all done online and over the phone.
In the end, I’m glad that I now know exactly what I’m invested in, and I like that the expected returns are going to be much higher than was I was getting before with my mutual funds.
WHAT CAN YOU DO?
If investing your RRSPs and getting higher returns interests you, then reach out and let me know. I can help direct you to more information so that you can make an educated decision about it!
SUMMARY OF PROCESS:
- Find Institution to invest in
- Do due diligence
- Open self-directed account
- Transfer-in funds
- Paperwork – Indemnity and Disclosure
- Pick Investments
DUE DILIGENCE – THINGS TO LOOK FOR:
- Reputation
- Historical Returns
- Detailed Information
- Diversification
- Correlation
MORE CONSIDERATIONS:
- How do you get your money back?
- How can you lose your money?
- Management experience
- Fees
- Liquidity
- Risk
- Transparency
- Reporting
- Revenue / Profit Share
- Taxation
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