The fall season is already here. This is not a surprise with the warm and cool temperatures we have been receiving lately. It feels that we have had a short summer season this year while we had a long and treacherous winter last season, which was longer than 5 months. I hope this coming winter season will be shorter, otherwise, I am thinking of taking long vacations in Central America, the Caribbean and Ghana.
I always feel proud and gratified when I help people who need help. Through a proposal offered to me by my mortgage broker, I recently lent some of my RRSP money to a couple to help them have a sufficient down payment to purchase their first home. This couple was affected by the mortgage stress test, where their lender approved them with a limited amount of mortgage financing. The money I lent to this couple is called a RRSP mortgage, which is a proven strategy successful real estate investors have used for many years to build wealth as part of their diversified financial portfolio.
If you are unfamiliar with a RRSP mortgage, I will explain it using my situation. I lent $15,000 of my RRSP to the couple charging them 12% in interest. The $15,000 amount is secured against the title of the couple’s property as a second mortgage. This mortgage protects the $15,000 in case the couple is unable to pay their first mortgage where, if it happens, I will receive back the $15,000 I lent to them plus interest and a portion of the profit from the sale of the couple’s property. In exchange for lending the $15,000, I also receive a lender fee of $1,500 upfront and $150 every month in interest payments which go directly back into my RRSP account TAX-FREE. Overall, I will earn $18,300 at the end of one year, which is a 22% return on investment!
Unlike stocks, bonds, mutual funds, exchange-traded funds and RRSPs in the stock market, the RRSP mortgage investment strategy provides several financial and tax advantages:
- As a private lender and investor, I earn investment income tax-free.
- I receive a steady, consistent income and a positive rate of return on my RRSP that will not fluctuate compared to RRSPs invested in the stock market that fluctuate.
- The couple is qualified to own their house where they will earn equity and value appreciation for themselves instead of renting.
- The couple has the opportunity to use the increased equity of their home to invest in real estate, pay down their debts or pay their childrens’ future education.
- Similar to RRSP mortgages, you can use your savings, inheritance, Tax-Free Savings Accounts (TFSAs), lines of credit or financial investments to lend as private mortgages to motivated people who need financial help to purchase properties, pay their children’s education or pay down their debts.
At the end of the day, everyone wins when applying this creative real estate investment strategy. As well, your money is working for you instead of you working for money while you are helping other people in need.
If you are interested in learning more about RRSP mortgages, why don’t we get started?
About the writer
Michael Arthur is a realtor with RE/MAX Core Realty Inc., who specializes in residential properties and leasing of commercial properties. He works with various clients that include first-time home buyers, real estate investors, business owners, renters, and homeowners who are going through life transitions, ranging from divorce to personal bankruptcy. He can be reached at (613) 890-SOLD (7653). Website: miketheagent.ca