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I've been studying and learning REI for about a year now. I am wanting to start with a few flips to generate some more capital to be able to get into some buy and hold properties. I'm building my team now - RE Agent, Contractors, etc and am wondering one thing. Should I start sourcing money partners to joint venture with now, or wait until I have a property? I am from Canada and one idea I have is to use RRSP money (Registered Retirement Savings Plan) to fund my purchase and reno needs. This allows PEOPLE to become the BANK and avoids so many complications - all while giving them a MUCH better return on their money than they are typically receiving - and all their profit is tax free as well. A great win-win situation! Anyway...I'm sure I am babbling as I tend to do that as I talk about this. What are your thoughts? Property or investors first??

VERY basic deal structure would be:

- 50/50 profit split

- minimum 15% return - but aim for 20%. I would even take a reduced profit to ensure all money partners received the minimum 15%, if needed, as I believe investors can and should be a lifetime relationship.

- projected timeline of 4-6 months (so if I can keep their money working for them via 2 flips per year they could earn 40% annually - all tax free!)

Thanks!

Kevin

VERY basic deal structure would be:

- 50/50 profit split

- minimum 15% return - but aim for 20%. I would even take a reduced profit to ensure all money partners received the minimum 15%, if needed, as I believe investors can and should be a lifetime relationship.

- projected timeline of 4-6 months (so if I can keep their money working for them via 2 flips per year they could earn 40% annually - all tax free!)

Thanks!

Kevin

Eleena de Lisser · Answer

In an ideal world, you should be cultivating a network of potential private money lenders and/or prospective investment partners before you find the property. Of course that's not to say you can't wait until after you've identified a property to buy, but it just seems like it will be way more stressful if you wait. All the real estate veterans say that a good deal will find the financing but to me it makes sense to be prepared and to start laying a solid foundation by lining up potential private lenders/investment partners to ensure you can get to closing and cross that finish line.

As the expression goes, dig your well before you're thirsty.

Identify a handful of people who you think might be receptive to lending  you money or becoming an investor in exchange for equity. People who  already know and trust you. These people ideally would have a decent  sum of money sitting in a bank/brokerage/retirement account that may not  be generating the sort of return they would like, so they would be  receptive to either lending you some money or investing in your project.

Start with your own personal social circle (friends and family). Start informing them about your real estate plans and begin to gradually educate them, if they don't have any prior experience, on investing in real estate and how they can either be the bank or an equity partner on a deal.

Before you approach people, give some serious thought to what you think might be more appealing to them so you can tailor your pitch. For example, an older, retired person might be more interested in giving you a loan and getting a modest rate of return in exchange for steady, monthly payments. A younger person might be more willing to handle more risk and want a larger upside by investing a lump sum at the outset and they get their earnings when you finish the flip and sell. Better yet, ask your prospective lenders/investors what they'd like, and negotiate terms that would be mutually beneficial.

It sounds like the RRSP is the Canadian version of the U.S. self-directed IRA. Put together a small packet of info explaining how people can use their RRSP accounts to invest in real estate and start sharing that info with the circle of people you're cultivating. Look for articles in business news sites or magazines that explain the process. Check out the websites of Canadian RRSP custodians to see if they have any upcoming seminars or webinars where you could suggest your prospective private lenders/future investors attend to learn more about the process of using these accounts to invest in real estate.

If the friends and family prospecting doesn't turn up any strong leads, start  networking like crazy with other real estate investors and small  business owners in your community. Join a local REIA. Get to know people who would be receptive to investing or might know other people who would invest or do private lending.

Good luck!

Roy N. · Answer

Kevin:

In reading your OP above, it appears you are considering writing a mortgage from your {self-directed} RRSP for a property in which you have an interest. The CRA has stringent rules around self-directed, non arms-length mortgages which typically requires the property to be a residence for you, or an immediate family member.

As Dale alluded above, the administration and service fees, combined with the CRA's requirement of a fair market interest rate (not too low, not too high, just right), typically make self-directed, non arms-length mortgages impractical ... especially in today's interest rate environment.

Now, you can hold an arms-length mortgage in your self-directed RRSP - the catch is there are only handful of trustees remaining who will allow such transactions {none of the Big 5 banks, or their brokerages, as they find them to be insufficiently profitable}.  If you want to get into the practice of holding 1st and 2nd mortgages for other (non-related) investors, you could setup your RRSP to make mortgages.  This can be very profitable.  Additionally, it is possible for several RRSPs to fund a single mortgage (though an appropriate broker), so you do not necessarily need to be able to carry the entire mortgage (you would make a little less in this arrangement as the broker would take a cut).

Gary McGowan · Answer

Great info @Roy N. I always direct people to people to Olympia Trust for RRSP mortgage investing.

Roy N. · Answer

@Kevin Drysdale

In addition to finding a trustee - on my last check only Olympia Trust, Canada Western Trust, Eastern Trust and Laurentian Bank (via B2B) were offering services for self-directed, arms-length mortgages - find yourself a broker who deals with private mortgages.

Working though a broker can reduce the need for any single lender to fund the entire mortgage - the broker can have multiple (though usually <=4) RRSPs fund the mortgage and take care of the servicing.  The trade of is they will take points upfront and possible an on-going charge for their role.

Eleena de Lisser · Answer

@Kevin Drysdale Thanks for the reply. I think if you've already determined what your general criteria is for the ideal fix and flip, you should share that info in advance with the people you are cultivating as future investors.

General criteria like neighborhoods/towns you're looking in, the type of house in terms of size/age/layout (3 bd/2 bath built after 1960, etc), along with a possible range for acquisition price and rehab budget.

Tell your prospects upfront that you haven't found the property yet and that the actual numbers will be different, but that this is the target you're shooting for. If they're interested in investing, ask them for a dollar range they might be interested in investing if you brought them a good deal. That way your contacts can begin to get accustomed to the idea and start thinking about what they might potentially be willing to invest when you do come back to them with the actual deal. Also, by sharing your general criteria with them in advance, you might get lucky and someone might even help you by telling you about a property that fits!

Good luck!

Kevin Drysdale · Answer

I'll try my best to reply to all the questions and comments. First, thank you to @Eleena D. for the great detailed reply. That is how I feel as well, but everyone I have talked to, or heard about, always seem to find the deal first then stress over the money part. Just wondered if it was possible to find investors first or if they actually like to see the deal before even giving a maybe. :)

Some clarification...I will be looking for arms-length people to fund my flip. So Roy nailed the reasoning in his final paragraph. Banks don't like them because the BANK doesn't make money - the RRSP holder makes all the money. There are a few trust companies that are setup to do self-directed RRSP accounts though. My biggest draw to using RRSP money is that I know more people with large RRSP accounts (that are probably giving a pretty weak return) and not so many people with large amounts of cash.

@Dale Plant I can't explain exactly how it works here as there are entire books written on the topic but this is not just limited to RRSP money - it can be RRSP, RESP, or TFSA accounts. If you are interested in getting an awesome book that details this strategy I would recommend "The RRSP Secret" by Greg Habstritt. The "best" version of this is using an arms length person/people and you can keep your property outside of CMHC, bank has no say, etc just like private money. It is done by setting up a self-directed RRSP account that about 4 trust companies will actually do for you. The lender then receives an RRSP statement and it will show the mortgage on their statement along side any other investments they may have at the same trust company. Fees to setup the trust account are very small. I see the approximate 40% return as an annual return and is only able to be that high if using RRSP money for a flip. If they get paid 20% within 6 months then it is like a 40% annual return with interest paid out twice annually. If I could do 2 flips back to back with exact same numbers (my perfect world example) it would be as if they invested $100,000 for one year and got paid $20,000 in June and $20,000 in December. Yes, it is actually two deals and two investments each returning 20% but that 20% is actually earned in 6 months - not one year. And yes...tax deferred interest would be the better way to describe it.

@Roy N. Using non arms-length RRSP money is a lot harder and you are stuck dealing with a bank still. As outlined above, arms-length is the way to go (it looks as if you've learned about this as well) because all the banking rules are cut out and the lender actually becomes the bank - setting terms (full payout on sale of property if shorter than 1 year term), interest rates (any agreed upon rate), and even the maximum funding - up to 100% ARV if they are willing to take a larger risk.

Dale Plant · Answer

If I understand what you are saying you are talking about holding a mortgage within your RRSP?

How does it work?

The investor has to have enough assets within the RRSP to cover the mortgage on a primary or commercial residence.

Once setup with the bank(s) the RRSP holder makes mortgage payments, at a prearranged interest rate, back to his/her RRSP.

The Benefits

The investor is basically paying himself the interest.

The investor has the option of setting the interest rate to the highest allowable at the time.

For those who are risk adverse, the predictable growth of the RRSP may be suitable for their risk profile.

Disadvantages

Depending on the relative size of the mortgage to the rest of the RRSP, your RRSP portfolio may lack diversification.

High fees – make sure you take all the associated fees into account as this will affect your ROI. There are many fees here and they are substantial.

Although you own the mortgage and are in effect paying yourself is you default the bank will act as with any other mortgage and foreclose to pay your RRSP.

I disagree that the profit is tax free, the interest earned on the mortgage accumulates within the plan tax free, however when you withdraw the funds it will become taxable. This is basically a tax deferral.

I do not understand your 40% return analogy. If you have 2 investments that earn 20% each your return is still 20% not 40. You have to take your entire investment into calculations.

Example 1

Example 2

Investment 1 $100,000

Profit $20,000

Return 20%

Investment 1 $100,000

Investment 2 $100,000

Profit $20,000

Return 20%

Total Investment $100,000

Total Investment $200,000

Total Profit $20,000 Return =   20%

Total Profit $40,000 Return =   20%

Your rate of return is the same but your actual dollars is larger in example 2.

One last point you can withdrawal from your RRSP if is this is your first home tax free. You then either have to payback a portion withdrawn back into the plan or take amount as a taxable amount as income. I think it is over fifteen years so if you took out $1500 in the RRSP Home Buyers Plan your would have to payback $100 into the RRSP or include it in your tax return as income.

Michael Moikeha · Answer

in a world of endless possibilities, why not both? In every conversation you have in your daily life, somehow bring up your REI plans, how you want to make it happen, and almost leave them wondering how they can possibily be a part of it. Leave a card, then set up a time to sit down to talk later.

This is done on the side while you look for properties.

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