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- Aug 30, 2007
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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 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 many mortgages, 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.
r />
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, several firms, in conjunction with industry experts, accounting firms and several
legal firms have created an RRSP and/or TFSA eligible investment
vehicle that allows your RRSP or TFSA, to participate in the
performance of real estate. This is explained, for example, in detail on our website. Our website also has a report on ttp://www.prestprop.com/8mistakes.html">`8 mistakes to avoid when investing in real estate syndications` that you will finds useful to distinguish between swindlers and serious operators.
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 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 many mortgages, 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.
r />
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, several firms, in conjunction with industry experts, accounting firms and several
legal firms have created an RRSP and/or TFSA eligible investment
vehicle that allows your RRSP or TFSA, to participate in the
performance of real estate. This is explained, for example, in detail on our website. Our website also has a report on ttp://www.prestprop.com/8mistakes.html">`8 mistakes to avoid when investing in real estate syndications` that you will finds useful to distinguish between swindlers and serious operators.