Table of Contents - The TFSA Multiplier Strategy with Darren Voros
Dave Debeau [00:00:09] Everybody, Dave Debeau here with another episode of the Property Profits Real Estate podcast today, zooming in all the way from beautiful Torana. We've got Darren Voros. How are you doing today, Darren?
Darren Voros [00:00:20] Good day to you. Thanks for having me on. I appreciate it.
Dave Debeau [00:00:23] My pleasure. So Darren's been a an active investor for a long time, and you've got to start way back in 2002. And he's done all sorts of cool stuff with real estate these days. He's focusing primarily on conversions. But what I really wanted to talk with Darren about is a very cool strategy, very smart strategy that he explained very, very well in one of his YouTube videos. Darren, I think you got an amazing YouTube channel, so people should definitely check that out, that's for sure. And it's all about what you call the T.F. as a maximizer. So for our American viewers and listeners, I'm not sure what the American equivalent is. You know, if there is one.
Darren Voros [00:01:10] Yeah, it's I think it's the Roth IRA in the US. They have their own game, which is the equivalent to our RSP in their Roth IRA is their tax free investing account.
Dave Debeau [00:01:21] OK. All right. So for us Canadians, there's this TFSA thing that most of us are very confused about. Very few of us, I think, actually use properly because it's called the tax free savings account. But Darren is going to show us a very, very cool way of really maximizing that and using that for investing, which a lot of people aren't, I don't think are aware that they can actually do so, Darren. First of all, how did you kind of come across this whole concept and and really dial it in?
Darren Voros [00:01:54] I think it started when I started borrowing funds essentially from other investors. And it was this idea of instead of using my my own money, I wanted to use what we call OPM, which is other people's money. And I started borrowing that money privately, either through a secured form, putting a second mortgage on my properties, or I did it in an unsecured form through a promissory note or something like that. And I started to people get more coming to me and saying, I'd like to use my RRSP money or I'd like to use my cash for my TFSA money. And then I sort of heard about this idea. I was through another investor. They said, actually, you can maximize the return on your TFSA if you structure things properly. And I kind of looked into it a little bit more. I checked with my accountant, of course, I checked with my lawyer and said, is this actually legit? Do we do this? And if it's structured properly, that absolutely there's a way to maximize that money being earned inside of that tax free savings account and minimize the return inside of your RRSP if that's what you're using on the other side of that. Because, as you know, Arizpe is not tax free. It is tax deferred. We're going to pay tax on that money. It's just a matter of when we withdraw that money. So that was sort of how I came about it. And then a lot of the deals that I've done since that that I've used private money, I've used this strategy which has been really beneficial to my investors and really has no effect on me as the as the borrower or the investor or the lender. So it's kind of a win win situation.
Dave Debeau [00:03:23] Very cool. So for folks that are really up to speed on what the heck a TFSA is, can you just give us a very, very brief compare and contrast the TFSA versus an RRSP type of an account?
Darren Voros [00:03:36] Yeah, I think, like the government didn't do us any favors with many, like you said, the tax free savings account. It should have been called a tax free investment account. And then I think people would really understand what they can do with it. But most people literally open up a tax free savings account at their local financial institution. They dropped 20 bucks in every month. They may have some savings that's left over from their checking account and they let that build it, whatever the bank's going to pay them at point five interest rate, that is like the rule of seventy two thousand seventy two. You divide it by our fixed rate of interest. That's going to tell us how long it takes to double our money. So if the bank's plan is half a percent, it takes a hundred and forty four years to double our money. Right. So not the financial plan that I'm interested in, that's for sure. So what we really want to do is take that money and use it in a way, if we want to use it in real estate, we have to do it in a very specific way. And that's through what we call a self directed tax savings account. And we can only do that with a couple of financial institutions in Canada and most financial advisors or even the banks. We'll tell you, yes, I can do self directed TFSA, then I can do self direct IRAs. Fees for what they'll generally put you in is their own product, bank product or anything like that, of course. Is that
Dave Debeau [00:04:48] right? So there you go.
Darren Voros [00:04:50] Yeah, yeah. I totally understand. It makes sense. They're trying to basically boost their profits, but as real estate investors, we can actually take that money to one of those two financial institutions that I know of. Olympio, trust or community trust open up a self directed TFSA or self directed. RSP account, and now we can invest in real estate through what's called an arm's length transaction, so arm's length to just explain it as simple as possible, is it if you or anyone of your immediate family has any ownership in that property, you cannot lend those funds to yourself. But I could lend my money to you, Dave, because there's no connection through family or marriage. And so essentially I can lend my TFSA money to you and as a second mortgage or a private loan. And now I can earn interest on that money like I would any other bank lending out money to an individual. So that's the easiest way to explain. I guess the TFSA and the RSP is the same. We can still do that inside of our arizpe. As long as it's in a self directed account. We can do that with our riff's, our lires. Anything registered to the government of Canada can be used to invest in real estate as long as it's in that self directed form and we go about it in the proper way in doing that arm's length transaction,
Dave Debeau [00:06:06] very cold air. And so, again, big picture, you know, most RRSP funds. Yes, you can build those up. They are tax deferred, though, right? So in all of your all of your funds that are in our Aspies, whatever, if you've got that in self directed Orestis, that's great. You can build that up. However, when you retire and when you start withdrawing those funds, that's when you get whacked. That's when the government comes in and says, OK, great, now it's time for you to pay taxes. So they're really just tax deferred. However, tax free savings accounts are actually tax free. So whatever interest rate you get within your tax free savings account, all of that money is yours to keep when you withdraw that that money. So for folks who haven't started a TFSA, what are some of the limitations? Because I think there's only the government doesn't want you to take in all your money from your RRSP and put a TFSA so they put some limitations on their. How does that work? Just very, very briefly? And how can we how can we get enough money in there to make it worthwhile to start investing in real estate?
Darren Voros [00:07:16] Yeah, it's pretty simple. If you were 18 years or older as of twenty nine and you're a Canadian citizen or hold an equivalent sort of permanent resident card, you can invest up to a maximum of sixty nine thousand five hundred dollars. That's the limit for twenty twenty. And then each year the government sets a new limit on the maximum amount of funds that you can contribute to your TFSA.
Dave Debeau [00:07:42] So we get sixty nine grand a year.
Darren Voros [00:07:44] No, sixty nine. Up until now. And that's if you haven't contributed anything. And moving forward, if you tap out, it's sixty nine thousand this year. The limit for twenty twenty one I believe is going to be six thousand dollars as an individual or twelve thousand dollars as a married couple. So each year they set that limit and then you can deposit the maximum amount or you can deposit whatever you want to do up to that maximum limit. The nice thing about the TFSA is if you withdraw money like let's say I withdrew like ten thousand dollars to renovate my house, I get to now top it up next year. So if I had sixty nine thousand I went through ten thousand in twenty twenty one I'd be able to contribute sixteen thousand because I've got the six thousand dollars from twenty twenty one and the ten thousand I took out from twenty twenty. So you can keep sort of putting money back in as you, as you take it out. So and again this is something that we're not taught a lot about. It's relatively new. Right. It came out about, like I say, twenty nine. So most people don't know how it works and they don't really understand what you can do with this account.
Dave Debeau [00:08:44] Now, is there a way for us to get some of our money from our RRSP into a TFSA? Is that possible?
Darren Voros [00:08:51] I get different answers on this all the time, depending on I
Dave Debeau [00:08:54] gave it here. You're not a financial planner.
Darren Voros [00:08:56] You're a real estate can look at from what I hear, from what I understand, the answer is no, because you're you're taking that money out of your RSP funds the money, you take it out, you are taxed on it so it can't be transferred over to your TFSA It has to be something that you're essentially just starting your TFSA fund. Now, like I say, there are some caveats to that and everybody's got a slightly different answer. So I would definitely lean on my accountants and the people that really know more about this actual the actual it really comes down to the CRA. What is the crazy right? Because we can do whatever we want to do, but it's going to be the tax ultimately decide. So speak to your accountant about it now and they'll be able to direct you.
Dave Debeau [00:09:38] All right, perfect. Well, that's enough preamble about all of this, but I think it's really important for people to get that. Just here's the sexy part about this whole thing, folks, is there is going to show us how we can start getting a twenty percent return on our money within that TFSA lending that out to Eger, real estate investors. And when most people hear that, they know who the heck is going to pay. Twenty percent. That's like credit card type interest. For a loan, so why don't you walk us through big picture how this works and I'm going to do my best, Daryn, to scribble and scratch some notes down here and maybe show it, because it's kind of a visual thing. There's some numbers going on here. So what can we do for an example here?
Darren Voros [00:10:21] So let's take that maximum value for now. That's relatively easy to work with, right? Let's say that sixty nine thousand five hundred dollars, let's say you have that in your TFSA right now. And let's say that you have for simplicity. Let's say you have an equal amount available in your RRSP or in a cash form or something like that, something similar. You have another sixty nine thousand five hundred dollars and you want to lend out to somebody.
Dave Debeau [00:10:48] Let's say it's an RSP just to
Darren Voros [00:10:49] keep it simple. But that does keep it right. And it makes a little bit more sense in RSP than it does in cash right now. So now my total that I have to lend out is one hundred and thirty nine thousand dollars. I've got sixty nine five in my TFSA, sixty nine five in my RRSP. And Dave, you're going to take that money to lend it to me because I'm an active investor, right. I'm constantly buying properties. Like I said, I'm doing this conversion project right now in Toronto. It's a million and a half dollar renovation and I'm going to borrow those one hundred and thirty nine thousand dollars from you. And I'm going to pay you 12 percent interest on that one hundred and thirty nine thousand dollars, which is a pretty standard interest rate for private lending if I'm in second position or something like that. Yeah. So one hundred thirty nine thousand at 12 percent on an annual basis. Right. We're going to be looking at sixteen thousand six hundred and eighty dollars in that one single year. Yeah. So if we divide that out because we're equally paying 12 percent in the arizpe 12 percent in the TFSA, we take that number, we divide it in half and we're we're we're going to put eight thousand three hundred and forty dollars back into our RRSP and we're going to put eight thousand three hundred forty dollars back into our deficit. We're dividing those equally because equal funds came out of both of those accounts. Eighty three. Forty eighty three for it. Absolutely. Right. Now, the thing about that is, is that in the RSP we had to pay tax on that money at some point. Right. And the idea with the RSP, the reason it was set up is, like you say, it's tax deferred and Canadians dump money into the RSP all the time because we are taught that when you put your money into your arms p a, it's going to grow. Everyone show that financial adviser, show you the graph. The longer you keep it and the longer it goes out, the more money you make
Dave Debeau [00:12:43] because the stock market does nothing about this. Right. So I mean, it's
Darren Voros [00:12:47] the problem is, is that a lot of people don't explain that anywhere between a two to three percent fee that's being charged on Canadians favorite things, which are mutual funds. But it in your put it in mutual funds and you can earn an average of seven or eight percent on an annual basis, which is which is true. But what happens is if you're somebody managing those funds is making three percent and three percent doesn't sound like a lot of money, but it's three out of eight percent that they're taking, not three percent overall. They're essentially taking one third of the amount of money that you're making and that's being charged back in fees. So the average mutual fund makes anywhere between three to four percent per year. And if we go back to that rule of seventy two, it takes like thirty six years people to double their money. So when they take it out,
Dave Debeau [00:13:38] those fees, they don't take that out of your profits, they take that out of your capital. Right. So it's every year whether they're making your money or not, you're getting dinged. So I have actually seen different graphs. It's worse
Darren Voros [00:13:53] than that. Right. I'm being I'm being optimistic and
Dave Debeau [00:13:57] very generous against the financial planning business.
Darren Voros [00:14:01] But if we look at that sort of idea and again, like when people do take that money out at the end, it's tax. So why would I want to put all my money in my RRSP? Why would I want to maximize returns? There are even equalized returns there. Why wouldn't I want to get them earning higher in my tax free savings account? Right, right. Yeah, exactly. So the idea here is instead of keeping my interest rate even at 12 percent across that sixty nine five and sixty nine five, what I can do is if I structure this properly, I can take my RRSP money and I can pay four percent interest to the RRSP and 20 percent interest to the TFSA. And if you look at those, you're saying, well now I'm paying twenty four percent interest. No, you're not right. Because when you look at that same one hundred and thirty nine thousand dollars or that you take sixty nine five and sixty nine five. So do your math there David. Take sixty nine thousand five hundred dollars and you making four percent interest on it. What's that.
Dave Debeau [00:15:03] That is you're telling me because I know my calculator.
Darren Voros [00:15:07] It's. Two thousand seven hundred and eighty dollars. This is that same one year, four percent on your R money and now you take your sixty nine five at your TFSA and you're going to earn 20 percent on that money and now you've got thirteen thousand nine hundred dollars inside of your TFSA. And when you add up 13 nine and what is the other number. Twenty seven. Eighty seven. Eighty. Yeah I get sixteen. Six eighty.
Dave Debeau [00:15:36] Exactly. So we're coming out with the same same amount as if we had it done twelve and twelve. But now we're doing twenty and four because we're blending these. So it's the same total amount getting loaned out to one thirty nine, but half of it's getting loaned out via the TFSA at 20 percent. The other half is getting loaned out via the RRSP at four percent total blended. So you as the the end user, the, the borrower now you're still paying the same net amount and still netting out to 12 percent blended for you, correct.
Darren Voros [00:16:16] Yeah. The difference for you though is you just made twenty seven hundred dollars that you have to pay tax on at some point and you made 13 and change that. You don't have to pay tax on that. That's the big difference. Right. And then and that's where you can kind of earn that 20 percent. And and it makes sense because your other balanced ones are only earning that four percent, like you say. And the way that we justify this with the with the CRA, the way that we can be structured is that it makes sense. And there's no red flags is. Yeah, exactly. Tax free and then tax money. The way that we do this is oftentimes when I'm private borrowing, when I'm using funds to finance a renovation or whatever that is, I often have a first mortgage on my property already and when I put a second mortgage in place, I pay a higher interest rate than my first one. And when I put a third mortgage in place, I'm paying a higher mortgage than my first mortgage, my second mortgage, the highest mountains, my third mortgage. So what we usually do, the structure this properly is if I'm borrowing funds from you, I'll put that RRSP money in a second mortgage at TFSA, money in a third mortgage, a registered to separate. Right. There's a slight, slightly higher cost to do this from the legal perspective. But it's not it's not enough to really worry about so much. But yeah, you get one in second position, one in third position. So now from the CRA perspective, I can say this is why we're paying four percent in second position. We're paying 20 percent in third position because there is a much higher inherent risk being in third position, because if this person defaults, first person to come in is going to be the bank. Then the second person is going to be to come in the second position. And the third position is going to be that TFSA money, and that's how we can justify paying those higher interest rates on those funds now.
Dave Debeau [00:18:05] And from the investor standpoint, they're still covered because they're both in second and third position.
Darren Voros [00:18:11] That's right. And ideally, you keep your loan to values in check and you're not over leveraging at one hundred and twenty one hundred thirty percent of the loan to value. You still want to stay underneath those loan to value levels that are comfortable for you as an investor.
Dave Debeau [00:18:25] That's brilliant, Daryn. So are you finding that people that aren't there's a bit of an education curve here to get people up to speed on what this is all about? I mean, we've just spent pretty much 20 minutes kind of going over this. So it must be a little bit of a hurdle to go public. Who's was not a real estate person, who's only heard all the hogwash, I mean, the education from the financial planning industry about where they should be putting their money, the their your friendly local bank or where they should be putting their money and all that kind of stuff. Is it a bit of a hurdle getting people on board with this, especially because they have to actually do something and open up a self directed account and all this kind of stuff? What are some of the challenges you see with that?
Darren Voros [00:19:09] Well, I think you get outside of the real estate investing world, and we are taught as Canadians that the higher the return, the higher the risk. Exactly right. And so that is ingrained in most people's heads. But what is your risk tolerance with your stock portfolio? Do you have any control over what Coca-Cola, Apple and Amazon do with their business now? You do not. Now, as a real estate investor, I can vet the deal that I'm looking at. I can look at that person's track record. I can look at how many transactions they have done. I can look at the loan to value on the property of the loan to value on the property. Even when I come in, in second and third position is only 70 percent loan to value that property would have to drop by 30 percent before I would be underwater and that person would have to default. Those two things would have to happen. Right. So if I'm doing my due diligence and I'm keeping my loan to value and check. This, to me, is a much safer investment than putting my money into the stock market, but so I think it's just it's about having those conversations. But I think the other thing that happens is people say, I'm all in there and just show me where to sign. And I say, OK, just all you have to do is go and set up a self directed account with one of those financial institutions and transfer your money over. So what do they do? They go back to their financial adviser.
Dave Debeau [00:20:34] Yeah, that's the worst thing that
Darren Voros [00:20:38] financial adviser says. This is so risky. I don't know why you're doing this. And it makes sense because I've got nothing against financial advisers. I just think that it's something where it's just somebody's livelihood. So it makes sense that they're sort of fighting tooth and nail to keep that that money there. And even the banks, sometimes I've seen people try to transfer from their TFSA to the self directed accounts and the banks will bury you in paperwork months and months and months and people trying to get this fund. So I always tell people, I say, find your transaction first. So find the person that you want to lend money to. That's me, right? Find me. I'll find we're going to agree on a deal. Then you're going to go and set up an account with Olympia Trust or Community Trust, and then you're going to ask them to hold the funds for you as opposed to pushing the funds to that one of those financial institutions to do the work. That's smart when it's Olympio Trust calling RBC and saying, can you just transfer over this person's funds? There's no questions asked and it usually happens within two to three weeks. Right. OK, that's why you're pushing those funds through your financial adviser, through anything like they're going to delay it. They're going to take all of these precautions and it's going to take months and months and months. So that's the biggest hurdle is often getting those funds out of the existing situation there in order to self. Correct.
Dave Debeau [00:21:58] And it requires a lot of babysitting on your on your part with your investor to make sure because people get sidetracked, distracted and frustrated. And so if you don't maybe something along the way, they're going to say, screw it, it's too much work. Right. So you've got to keep it real brilliant. Stop. And time flies when we're having fun. Thank you very much for educating us about this very, very, very cool TFSA maximizer strategy. I really appreciate appreciate all the education you're putting out there. If people want to find out more about you and maybe watch some more cool videos, what should they do?
Darren Voros [00:22:34] Just go to YouTube for Wigdor and girls. That's the easiest one. Or check out my website, Dorenbos Dotcom.
Dave Debeau [00:22:40] That's pretty easy. Yeah. Thanks very much. Thanks, Dave. All right. Take care. We'll talk to you in the next episode of. Well, hey there. Thanks for tuning into the Property Profits podcast. If you like this episode, that's great. Please go ahead and subscribe on iTunes. Give us a good review. That would be awesome. I appreciate that. And if you're looking to attract investors and raise capital for your deals, that may invite you to get a complimentary copy of my newest book right back there. There it is, the money partner formula. You got a PDF version at Investor Attraction book, dot com again, investor attraction book, dot com ticker.