Tired of just hoping your retirement savings won’t drop in your investments? Want some level of assurance that your money will grow in your retirement savings account? Do you want to enjoy the kind of returns a bank does? Want your retirement savings secured by a hard asset? If you answered yes to any or all of these questions then what I’ve got for you today should get you excited!
If you’re reading this wondering what the heck an Registered Retirement Savings Plan (RRSP) is, then you’re not from Canada. And, if you’re not from Canada, what I am about to say is only going to be moderately helpful. I believe the steps are similar for U.S. folks wanting to offer a mortgage from their IRA but I don’t personally know for sure.
What I am going to share with you, on a very high level, is what we’ve learned about RRSP mortgages this year as we put together funds from four different arms length self directed RRSP accounts to borrow as a mortgage on a rental property we own. Basically, we found someone with about $30,000 in his RRSP account that was willing to round up some other people he knew with funds in their RRSP accounts to create a mortgage of $100,000 that we could use to put a second mortgage on a property we have owned for a long time.
This enabled us to free up some much needed capital for repairs, purchases, and some corporate restructuring we were doing within our family corporation. For the RRSP lenders it created an opportunity to make 11% on their money each year, backed by an asset with a lot of equity in it.
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So, what do you do to create a mortgage from your RRSPs?
- Move your money. You don’t move your money OUT of your RRSP account. That will trigger some big tax consequences. What you want to do is create a self directed RRSP account and move money from your managed RRSP account into the new self directed account. This needs to be with an institution that will allow you to hold arm’s length mortgages. We have worked with Olympia Trust but there are others.
- Find a borrower. Head on out to your local real estate investing club. I talked about how important it is be to be involved in your local clubs, and finding folks who will make great borrowers is as simple as putting the word out at your local club.
- Review the deal. If something goes wrong and the borrower stops making payments you can foreclose on the property. Given that you have that remedy, it makes this investment much less risky than investing in a mutual fund or a stock where you have no recourse if things go wrong. That said, you want to ensure there is enough equity in the property that you will recover your investment and then some. To do this have an appraisal done and review a recent mortgage statement to confirm the outstanding balance on the first mortgage if there is one to ensure there is plenty of equity in the property (personally I wouldn’t loan past 80% of the property value … at least not without some up front fees and a higher interest rate to amply compensate me for the additional risk). I also would investigate the area the property is located in and the rents it would get. If it’s a deal I wouldn’t ever invest in myself I am not going to loan money on it either. Finally, take a look at the borrower. What’s their experience and track record with similar investments? How is their credit?
- Settle on terms. Once you know what you’re getting into, you can settle on the terms of the deal. What interest rate do you need to earn? What payment terms do you want? What does your borrower need? Come to an agreement and have a lawyer draft up the mortgage document that will be registered on title. You’ll need all the details with regards to who pays what fees, what those fees are, and the payment schedule.
- Fund the deal and sit back while your money grows. At this point it’s mostly the trust company and your lawyer that will take care of these details. After the mortgage is funded you basically wait while your money grows. Payments will be made based on the schedule you’ve agreed to, and will be put into your self directed RRSP account. If, for some reason, you do not receive a scheduled payment, you’ll be notified and can take action if necessary.
It’s a great way to have an investment secured by a real hard asset. An asset that you can drive by if you really feel the need to check up on your money. The payments go straight into your account so you don’t have to do anything once the papers are signed. You really can sit back and relax. It’s low stress, lower risk and often higher return than any other RRSP investment option you can find out there.
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