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How to Use RRSP to Buy Investment Property in Canada

Real Estate Faizal Garasia 22 Oct

A few decades ago, most Canadians would work, earn money, and spend their salaries on bills and other expenses. There’s no particular value given to preparing for retirement. That is why, in 1957, the government enacted the Registered Retirement Savings Plan (RRSP) as part of the Canadian Income Tax Act. This is to encourage every working Canadian, whether employed or self-employed, to have savings to their name once they decide to retire.

How does RRSP work?

Since RRSPs are managed and monitored by the Canadian Revenue Agency, there are certain rules and guidelines governing it.

For its contribution, anyone who is employed and a certified taxpayer of the country can open an RRSP account. If you decide to open an account, you may deduct your RRSP contributions from your income. When this happens, you immediately reduce your tax payments. Your pre-tax income goes into your RRSP contributions. It will remain tax-free as long as you don’t withdraw your funds. Once you withdraw your savings from your RRSP, you will then have to pay for your tax at a marginal rate. This will still save you some bucks since marginal tax rates are lower in your retirement years

So, how does your savings in RRSP grow? Your contributions will be invested in bonds, mutual funds, equities, income trusts, and foreign currency, among others.

Can I use my funds in RRSP to purchase real estate investment properties?

Yes, you can use your RRSP funds to invest in real estate. However, you can only do it indirectly

How can I invest in real estate using my RRSP funds?

Here are three common ways you can invest in real estate properties in Canada:

Real Estate Investment Trust (REIT)

REITs are corporations that manage real estate properties or mortgages on real estate properties. It works like mutual funds or stocks, wherein various real estate properties are pooled together to create a diverse REIT portfolio. Since it works like stocks, you have the opportunity to choose whether you invest in retail, healthcare, residential properties, or mortgage REITs. You can diversify your REIT portfolio. You can also sell your shares for liquidity.

Mortgage Investment Corporations (MIC)

MICs are known as mortgage lending companies that cater to homebuyers who have been rejected by banks and other traditional lending institutions. You can invest in MICs so they can lend their money as a mortgage to potential homebuyers. Since most MICs provide short-term loans, you are guaranteed to have at least 2% returns on your investment in 6-12 months.

Lend your RRSP funds to a real estate investor

If you have more than enough funds in your RRSP, you can lend it out to real estate investors. This is more flexible because you can choose who can borrow your money on your agreed payment terms and interest rates. All you need to do is to make your agreement in writing and attested by your lawyer. Should the borrower default on the agreed payment, this document could help support your claim.

Can my RRSP serve as funding for home equity loan?

Although it is quite a complicated process, you can loan from your RRSP to fund your mortgage

If you have an RRSP fund that is equal to the amount of your mortgage, you can use your savings to pay your mortgage lender. In turn, you will have to make monthly payments for your mortgage to your RRSP.

On the other hand, if you already paid off your mortgage, you may apply for a home equity loan. You can use it for other investments that could potentially provide high returns. You can then withdraw your RRSP funds to pay your home equity loan fully.

When you think about it, you’re actually just making payments to yourself!

What should be my next move?

Like any other smart real estate investor, it is best if you consult a mortgage specialist before you take any action on your RRSP. You can contact Faizal Garasia, one of the most trusted . He will help you fully understand the ins and outs of using RRSP to fund your property investment. If you have any questions about mortgages or investing in real estate, he has answers to all of it! Schedule your appointment with him today!