One of the most convenient (yet overlooked) ways to secure funding for your next real estate purchase is through a Registered Retirement Savings Plan (RRSP). If you know someone with funds squirrelled away for retirement, working with them to put those funds to work as part of a real estate investment is a great option. Interested in exploring RRSP funding for your next real estate investment purchase?
Table of Contents - The 7 Essential Steps for Using RRSPs to Fund Your Deals
Here’s a quick roadmap for how to secure these funds and put them to work!
Step 1: Find a lender
The first thing you need to do to tap into RRSP funds is to find someone willing to lend them to you! Outside of your immediate family, this can be just about anyone. You’ll want to talk to someone you know well and who trusts you, as they’ll be lending you a large sum of money and you’ll have to pay it back with interest!
It’s best to start with extended family and work your way out to friends. If you don’t know anyone with RRSP funds, it might be time to take your case to your local real estate investing club. Ideally, you should be looking to work with someone who has upwards of $30k to lend you. Anything less than this and an RRSP funding solution doesn’t always make sense because of the interest expenses associated with paying it back.
On the flip side, you need to be careful of exactly how much you’re borrowing against the value of the property you’re purchasing. Being over-leveraged isn’t a good thing!
Step 2: Choose a trustee
Once you have someone willing to lend you the money from their RRSP account, you’ll need to find a trustee that works specifically with these types of mortgages. In Canada, there are a few trustees that are knowledgeable and recommended such as Olympia Trust and Canadian Western Trust.
Reach out to potential trustees and let them know your situation. Most will be able to walk you through the next steps and answer questions you or your lender have about the process. Much of the information and forms you’ll need are available online, however, it never hurts to get on the phone with someone or start an email correspondence.
Step 3: Lender opens a self-directed RRSP with the trustee
Once you’ve found a trustee you’re comfortable working with and you have your questions answered, it’s time to open an account. To execute the RRSP funding, your lender will have to open a new, self-directed RRSP account with the trustee. This new account can be just about any type of RRSP account, including a locked-in retirement account (LIRA) or a registered education savings plan (RESP). As long as it’s a tax-advantaged registered savings plan, it should be valid. Your trustee can tell you more.
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Step 4: Lender funds the account
Opening an account isn’t enough—the next step is to fund it! But, this is the most cumbersome and time-consuming step. First, your lender will need to find a way to move the funds out of their current RRSP account and into the trustee RRSP account. This is easiest if you liquidate any stock or bond holdings. Then, the money needs to be wired to the new account. Finally, it’ll take a few days for the funds to settle. All in all, this process could take anywhere from a week to several weeks, depending on the swiftness of the process! Just remember, this money isn’t coming out of the RRSP account in any way yet! It’s simply being transferred between two qualifying RRSP accounts. This won’t trigger a taxable event for your lender, which is very important.
Step 5: Complete the due diligence
There are all types of due diligence aspects of an RRSP funding situation. If you’re pursuing this course of action, make sure you’re checking all the right boxes! Among the most important are making sure the funds you’re borrowing from someone are registered against a property and to ensure a good loan-to-value ratio (leverage). For example, if you’re already using borrowed funds to pay for a property (mortgage) and are also using RRSP funding, make sure the cumulative value of this is less than 85% of the value of the property or you could find yourself overleveraged.
Step 6: Complete the paperwork
When the time comes to fill out the myriad of paperwork for executing RRSP funding, make sure you’re being guided by someone who has specific experience in these situations. If you work with a lawyer for your property acquisitions, run any documentation by them. Also, make sure your trustee explains documentation to you. Finally, if you have a mortgage broker you’re familiar with, they’ll have insights as well.
Step 7: Find the perfect property!
Once everything is signed and filed, you’ll have access to the RRSP funding you need to invest! Make sure you’re putting it to use wisely since you’ll immediately start paying interest on it. It’s often a good idea to have a deal in the pipeline or have promising prospects for your next purchase. When the time comes to pull the trigger, you’ll have the funds you need!
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How the RRSP Works
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