How to Invest RRSPs in Real Estate

February is traditionally RRSP season and while you are rushing to contribute and reduce your taxes, we wanted to talk how to invest these money into real estate.

There are two main ways you can invest your RRSP in real estate. First one is non-arm’s length, i.e. hold a mortgage on your own property.  In order to do that you have to hold the entire mortgage, which means that you need to have a significant amount in your RRSP (typically over $200 000). Also you have to pay yourself interest and it has to be comparable to what is paid on the market. Typically 2% would be a minimum you can pay.

Second way is more attractive for investors – arm’s length projects. This means that person who owns real estate (or corporation that is buying a property) can’t be related to you. You can hold first, second or any other consecutive mortgage for any amount and any period of time. As you can see, there is no need to have large amounts in RRSP, but it makes more financial sense if you invest over $20 000 for over a year. This is mainly because of the bank and lawyer’s fees that will be involved.

So what do you need to hold a mortgage from RRSP? First of all you will need to open a self-directed RRSP account and pay about $150 account set up fee.  Then you  transfer your funds there. Note that the transfer takes 4-8 weeks, so you need to start ahead of time. You will have to pay a monthly fee on self-directed account, which can be as little as $10. Make sure you have following documents:

·         Copy of Mortgage you are taking (the mortgage must include interest rate, maturity date and payment amount with a minimum of one payment annually). Most of the banks that administrate self-directed accounts will accept up to 100% loan to value financing.

·         Valuation of Property (Tax assessment for the current year or Purchase/Sale Agreement if the property was sold within the last year and the transaction was arms-length or appraisal dated within the last six months)

·         Information Statement as to amount outstanding on prior encumbrances

·         Current copy of title

·          Any existing mortgages that are being funded or transferred to the registered plan must be current

You bank might request additional documents. Once you have all that submit it to the bank and your lawyer. Bank will then transfer that funds to lawyer’s trust and then it will get distributed. Note that typically you will have to pay mortgage set up fee of about $100.

As to the interest you receive, ask for postdated checks or request automatic deposit to be set up. Your bank might charge for checks deposits (something like $2). At the end of the deal you will have to pay mortgage discharge fee to the bank ($25) as well as lawyer’s fee.

Hope this shades some light on the confusing investments with RRSPs