L stands for LOCKED-IN. It is an RRSP, just not cashable until retirement age ! Thus, if I say RRSP, it includes a LIRA.
Thus you cannot take the money OUT.
However, you can use $s in it for real estate just like any RRSP $s.
An RRSP or TFSA should be viewed as a basket of investments. In the
basket you can place various eligible investments or financial
instruments. Some of these RRSP or TFSA eligible investments can
include: stocks, bonds, GICs, mortgages, call-options, cash or mutual
funds ....but NOT real estate directly.
So, how then can you participate in real estate with your RRSP or TFSA ?
For
most Canadians, investing in or participating is real estate can be
done inside their RRSP or TFSA, however there are some restriction.
Either way, inside or outside an RRSP or TFSA, investing in the right
real estate can pay excellent long-term dividends ` if done well !
Three broad options exist to participate in real estate within your LIRA, RRSP or TFSA !
Option 1: Mortgages.
Most real estate is encumbered by a mortgage. A mortgage is a loan,
secured by real estate. It is not real estate ! However, a mortgage is
a safe way to invest in real estate, but you do not participate in the
overall performance of the real estate ! Your TFSA or RRSP becomes the
lender. You are the bank ! You can hold
a) a single mortgage or
b) a share of a mortgage, called a syndicated mortgage, or
c)
shares in a MIC, a Mortgage Investment Corporation. A MIC pools many
mortgages and allows the individual investor to co-own a share of
multiple mortgages in their RRSP or TFSA.
The risk of this
investment, namely payment default by the borrower, has to be compared
to the fixed return of this investment, from a low of perhaps 4% to
usually in the high single digit range to perhaps the lower double
digit range for more risky assets. A second consideration is if the
mortgage is on a to-be-constructed property or an existing property. As
a broad rule of thumb, a to-be-constructed property carries a much
higher risk of non-payment, as the property does not yet exist. As such
the interest rate on this mortgage should be much higher to compensate
for this additional risk.
Consider return OF your capital
before you consider return ON your capital when evaluating this first
type of RRSP eligible investment option !
A tertiary
consideration is the position of your mortgage on the property title.
If you are in 1st position, and the mortgage is unpaid, you are first
in line to get paid from a foreclosure action. Even then loss of
capital is possible, especially in a construction mortgage. If you are
in 2nd or in 3rd position, other lenders get paid first. Thus, the risk
of non-payment increases with the increase in position on title. Some
trustees or MICs don`t allow 2nd or higher position mortgages, but some
do. Therefore, before you invest, do your homework on the risk of the
loan .. and then gauge if the offered interest rate compensates for
this risk !
Option 2: Publicly traded stocks that invest in real estate.
On both the US and Canadian stock exchange there are a number of firms
that invest in real estate. Some invest in apartment buildings. Some in
commercial properties like industrial parks, office buildings or retail
malls. Others invest in hotels, campgrounds, trailer parks or
recreational properties. Some invest internationally, all over the
world, and some only in certain cities. Some hold existing properties,
other invest in land projects or construction.
A common
sub-class of these publicly traded firms is a REIT, a Real Estate
Income Trust. A REIT pays out the majority of its income monthly, and
as such can be an excellent vehicle for retirees or those folks seeking
monthly income. In a sub-sequent article I will explore some of those
REITs or stocks with specific commentary. There is the expensive
brother of the real estate stock or REIT, a mutual fund .. or its less
expensive diversified sister, the index fund or ETF.
All these
publicly traded vehicles provide the benefit of instant liquidity,
quarterly reporting and regulatory oversight, but also the severe
drawback of stock investing in general, namely market sentiment, wild,
unexpected swings because some politician said s.th. or a report came
out that was less positive than expected, buy/sell manipulation by
insiders or panic selling due to rumours or opinions by market analysts
or newspaper articles (that may or may not be accurate).
Option 3: Private firms that invest in real estate.
Many people seek an investment vehicle outside the often irrational
stock market. People have to live somewhere if the market is rising or
falling. People go shopping, albeit less frequently, if the market is
down. Trucks need repair facilities owned by someone. Office workers
need space. Etc. ... REAL estate has been around 1000`s of years .. and
will be around a further 1000`s of years. Have you been to Rome ? Some
buildings were built over 2000 years ago and still exist .. but I
digress.
To buy or build real estate much expertise .. and
much money is required. Therefore, the idea of coupling expertise with
money partners is a perfect marriage. A corporation or partnership is
formed. It is not a new concept, though ! England, Holland and a number
of nations explored the world several hundred years ago by ship. To
finance those fairly expensive shipping expeditions partnerships were
created. The captain and his crew got a share, as high as 50% of the
profits (spices, gold, slaves, land, ...) and the ships` financiers get
the rest. Write a cheque for 4,000 pounds, and I name a mountain after
you, write a cheque for 10,000 and your name is on a new city and you
get 2% of the wares. Or s.th. along these lines .. and the idea of
limited partnerships were born.
The idea of a (limited)
partnership is that one party has the expertise, say to prospect,
analyse, buy and manage apartment buildings. Others have money to
invest, seeking a fair return, but lack the expertise, the time or the
desire to prospect, analyse, buy and manage assets. One party invests,
the other parties does the work and profits are split according to a
pre-determined, and annually inspected, formula. Since this corporation
or limited partnership owns real assets, in the real world, with real
money changing hands for real assets, the values can be established
relatively readily, without the often irrational stock market value
swings. It can provide a better alternative to investing in the
publicly traded market.
Thus, a number of private firms in
conjunction with industry experts, accounting firms and several legal
firms have created an RRSP and TFSA eligible investment vehicle
that allows your RRSP or TFSA, to participate in the performance
of real estate, using a bond/share structure.
