using RRSPs for an investment property

[joelhfx]

Hello Everyone,



I want to use my RRSP savings to purchase my first investment property and I'm curious to hear if there are problems with this approach that I haven't considered.

I'm okay with the fact that I will lose the contribution space and have portions withheld for taxes and possibly face more tax penalties at tax time.



Has anyone here done this?



Joel Richard

 

[Thomas Beyer]

Only certain eligible investments are allowed in an RRSP such as stocks, bonds, call options, ETFs, trust units, REITs, shares of certain private firms or mortgages. You could place a mortgage on someone else's property or on your own with CMHC insurance. Several trustees allow that such as OlympiaTrust, B2B, Pacific Western Trust or Canadian Western Bank. Check their very specific guidelines. Of course you can cash out the RRSP and pay taxes on it and in some instances it may make sense, or in many, not.

 

[joelhfx]

[quote user=ThomasBeyer] Of course you can cash out the RRSP and pay taxes on it and in some instances it may make sense, or in many, not.



I was referring to cashing out. I believe I can make this work for me.

 

[bizaro86]

[quote user=joelhfx]Hello Everyone,



I want to use my RRSP savings to purchase my first investment property and I'm curious to hear if there are problems with this approach that I haven't considered.

I'm okay with the fact that I will lose the contribution space and have portions withheld for taxes and possibly face more tax penalties at tax time.



Has anyone here done this?



Joel Richard





It sounds like you've considered the major problem, which is that you'll pay a bunch of extra tax. Every dollar you pull out goes into your income for that year, so it'll get taxed at your highest rate, and may push you into the next tax bracket.



That's the reason the vast majority of people try to use non-registered funds.



Regards,



Michael

 

[Alvaro Sanchez]

I would consider cashing out as the last option (as emergency).. you still have options to use your RRSP money as investment in RE or provide some kind of guarantee for a loan.

 

[TangoWhiskey]

[quote user=bizaro86]It sounds like you've considered the major problem, which is that you'll pay a bunch of extra tax. Every dollar you pull out goes into your income for that year, so it'll get taxed at your highest rate, and may push you into the next tax bracket.







I haven't done it, but the theory would be to use your RRSP to smooth out cashflow between jobs or while waiting for a business or multi family or other income generator to come up to speed in replacing employment income. This would work mostly with high tax jobs - contribute to the RRSP while working to get the 40 % tax deduction - quit, become a real estate investor or whatever at a much lower income level, and draw down the RRSP while paying a much lower tax rate of say 0 or 18 %. Its a great plan but requires a pretty strong plan and ability to execute or you might end up sans job and sans RRSP's.



In my experience, the best returns I was able to generate in an RRSP without significant time involvement were second mortgages .... but this has real hidden risks as well ... if you believe that you can generate higher returns through real estate than with your $$ in an RRSP then pulling it out makes sense. With a long term buy and hold you should make returns higher than any mutual fund can pay you so long as you minimize transactions costs ie don't sell thus incurring taxes and real estate commissions.

 

[joelhfx]

I wouldn't say that this is an emergency but I look at it this way.

• If I do not use these funds for real estate investment, I will be delaying my first property purchase by about 2 years if I'm lucky.
• The money inside my RRSP invested in my aggressive growth mutual fund will likely continue to under perform for the next 5 years. The peaks and valleys of the market aren't averaging very much in my favor.
  Even with a significant tax loss, the ROI of real estate should dwarf the ROI from my RRSP.

Are any of these beliefs wrong? Could the above situation be considered an "emergency".



Given that I do not have other options for financing my purchase. Wouldn't cashing out my RRSP be the best choice?



A thought: - I know I am able to write off some depreciation value of my property every year, would this help ease the tax pain of this approach significantly?



Joel Richard



Thanks for your responses so far.

 

[bizaro86]

[quote user=joelhfx]A thought: - I know I am able to write off some depreciation value of my property every year, would this help ease the tax pain of this approach significantly?





No. You can't use depreciation (CCA in Canada) to create or increase a taxable loss. But the "income" from cashing out your RRSP will be taxable at your full marginal tax rate.



Personally, I think you need to take a long look at what rate of return your real estate would have to get compared to a mutual fund/stock investment and then decide. If you don't know how much better it needs to be (as a percentage return) to make it worth doing, then you haven't done enough research to make an informed decision.



Regards,



Michael

 

[joelhfx]

[quote user=bizaro86]Personally, I think you need to take a long look at what rate of return your real estate would have to get compared to a mutual fund/stock investment and then decide.



I took your advice, and the numbers look good. I intuitively knew this would work, but it really was an eye opener to see the numbers. My calculation accounts for all the tax losses as applicable to me in my plan. Leveraging and having tenants pay your mortgage is tough to beat. I just need to make sure I can handle the tax bill when the time comes.

 

[bizaro86]

[quote user=joelhfx]but it really was an eye opener to see the numbers



I'm glad to hear that. I always think it's nice to know just how good a plan really is, and numbers can help with that.



It sounds like you've got it figured out (esp. regarding to keeping money to pay the CRA when their bill comes) and understand the benefits of real estate. Good luck!



Michael