Using Your RRSP to Fund Your Next Real Estate Investment Wisely in 2023
An RRSP is a sort of investment account that is only available in Canada. Compared to non-tax-preferred versions, it allows residents to hold cash and investment assets with various financial benefits. Many individuals think of Registered Retirement Savings Plans as a source of income after they retire. On the other hand, Registered Retirement Savings Plans can help you increase your net worth and wealth before you retire.
Savings accounts, corporate stocks, bonds, income trusts, Guaranteed Investment Certificates (CIGs), foreign currencies, mutual funds, and mortgage loans are examples of RRSP-approved assets. Bonds, high-yield savings accounts, and corporate shares are popular Registered Retirement Savings Plan investments for many people. Broadening your RRSP into real estate will help you make the most of your money while also ensuring that your net worth grows steadily.
While many individuals utilize Registered Retirement Savings Plans to save for retirement, you can actually use your Registered Retirement Savings Plan today to begin the process of generating wealth. You can use the tax advantages of RRSPs to help you get a better return on your real estate investments.
It is worth mentioning, though, that you cannot utilize an RRSP to buy a rental property outright. However, there are a few options for putting your RRSP money to work in the Canadian real estate market.
But first, before you dip into your RRSP, click the link below to learn about your financing options over a free strategy call with us at LendCity.
Real estate choices for RRSPs
Because you cannot buy an investment property with an Registered Retirement Savings Plan, you might be asking how you might use your investment account to get into real estate. Below are some of the most common techniques to use your RRSP to fund a real estate investment:
Real Estate Investment Trusts (REITs)
REITs are referred to as publicly traded businesses that buy high-value real estate intending to increase shareholder wealth. While you will not see your money rise as quickly as you would with a direct investment, REITs are a safe and dependable option to put your RRSP money to work in real estate. A team of real estate industry professionals manages your investment.
Lending Registered Retirement Savings Plan funds to investors
Consider lending RRSP funds to a real estate investor if you want to invest your RRSP with a somewhat higher risk and the possibility for a significantly higher payoff. This is approximately the closest you will get to owning a rental home. You use your Registered Retirement Savings Plan funds to issue a mortgage when you lend to investors.
Mortgage Investment Corporations (MICs)
Mortgage Investment Corporations (MICs) are like REITs in that they permit you to invest your RRSP funds in real estate with no risk. MICs are financial institutions that exchange mortgage loans and charge high-interest rates.
It is worth noting that, while you can't utilize your Registered Retirement Savings Plan money to buy a rental property, you can use it to develop or buy your own home. According to Revenue Canada rules, you can take up to $25,000 tax-free from your RRSP to build or buy a primary qualifying property.
While you will not earn passive income from your home residence, it's still an investment worth considering. Before withdrawing the funds, speak with a tax attorney to be sure your prospective property qualifies.
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Registered Retirement Savings Plan funds are being lent to real estate investors
Consider lending your RRSP savings to another private investor if you wish to expand your money. While it might appear a somewhat difficult undertaking, it is actually quite simple. To use your RRSP to lend money to a fellow real estate investor, follow these steps:
Choose a borrower
You'll need to find a borrower first. It is preferable to lend your RRSP savings to someone you can trust and who has a lot of experience in the real estate sector in their target area. Meetings of local real estate investors can be a fantastic way to meet potential borrowers.
Appoint a trustee
After that, you will need to appoint a trustee to manage the funds. They will help you with the process of shifting money around and funding your borrower's loan. It is critical to indulge with a reputable trustee licensed in the province where you live and where the real estate transaction will occur.
Create a self-directed RRSP fund
You'll need to create a self-directed RRSP fund and transfer funds from your current Registered Retirement Savings Plan to it. You will not have to pay any tax penalties because you are not cashing out the funds—you are merely changing them from one form of RRSP to another.
Conduct due diligence
Before finalizing the transaction and funding the loan, ensure you are making the best investment option possible. Complete your homework on the person you are borrowing money from. Examine their previous business dealings. Do they have a track record of accumulating riches through real estate investments? If not, you may want to consider investing your money elsewhere.
Complete the transaction and increase your wealth
After you have completed your due diligence, you will need to complete the paperwork and finance the loan. This process, which is far more straightforward than it sounds, will be guided by the company you hired as a trustee. You may sit back and watch your money grow once the loan is approved.
Taking your RRSP funds out of the bank and investing them will help you optimize your assets and earn the best possible returns. Putting your Registered Retirement Savings Plans into real estate is a great way to sit back and watch your money increase with minimal effort on your part.
The RRSP is an excellent way for smart Canadian investors to increase their wealth and retire comfortably. Consult a tax attorney or a real estate industry professional to discover more about investment alternatives available to you if you are seeking a unique approach to maximize your Registered Retirement Savings Plan.
On the other hand, remember that you can team up with another real estate investor and then use their Registered Retirement Savings Plan to finance your next project!
If you would like to learn more about your real estate financing options today, click the link below to book a free strategy call with our team at LendCity today.