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Using Your RRSP to Buy Investment Property: A Comprehensive Guide

By Jason Anbara | Posted on January 26, 2024

Person looking to use their RRSP to buy investment property and calculating the returns.

Real estate investment is a popular portfolio diversification strategy among Canadians, offering long-term financial stability. While buying property may be a more traditional approach to real estate investment, know that it is not the only way: you can invest in property indirectly with your RRSP. 

While doing so provides several important tax benefits, this strategy also requires much planning and research. In this comprehensive guide, we will explore in detail how to use RRSPs to buy investment properties and alternative strategies to help you reach your investment goals.

Key Takeaways

  • An RRSP is a tax-advantaged retirement savings plan registered by the Canadian government.
  • Using RRSP funds to invest in private real estate is a lucrative yet complex investment approach, best left to a dedicated private lending company.
  • Avoid allocating RRSP funds for a down payment; instead, consider using these funds to purchase a primary residence through The Home Buyer’s Plan.
  • The Home Buyer’s Plan cannot be used to purchase an investment property.
  • Working with a private lender or mortgage administrator allows you to invest your RRSP in private real estate without extensive risk or work on your behalf.

 

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What is an RRSP?

An RRSP, or a Registered Retirement Savings Plan, is a savings plan to which individuals can contribute money for retirement purposes. RRSPs are registered with the Government of Canada and provide significant tax advantages. 

For example, RRSP funds are exempt from being taxed in the year of contribution. Any investment income earned from funds held within the RRSP will also be tax-deferred until they are withdrawn from the savings account. Finally, RRSP contributions are tax-deductible, meaning they can be deducted from the current year’s tax return, minimizing the total amount of taxes owed.

Couple sitting down with a professional discussing how to use their RRSP to buy an investment property

How Do You Invest RRSP in Private Real Estate?

Funds deposited into RRSPs not only offer taxation advantages—they also allow for a range of investment assets. While most Canadians follow their bank advisor’s recommendations and invest in standard stocks and mutual funds, more seasoned investors can benefit from investing their RRSP funds in private real estate. 

This investment strategy involves lending savings directly to real estate investors, who use the funds to purchase, build, or renovate properties. In return, you earn interest on the investment, receiving a reliable source of income. Furthermore, using an RRSP to buy into an investment property can provide tax benefits, such as the ability to deduct losses against other investment income and defer taxes until retirement, when your overall income will likely be lower.

However, investing your RRSP into private real estate isn’t as straightforward as other investments you choose to make. It requires a thorough understanding of the private real estate process, and, as a result, the assistance of a private lending company like NorthLend Financial can make all the difference in securing your investment and seeing handsome returns.

Finding Borrowers

The first step for using RRSP to invest in real estate involves finding suitable borrowers. While you may attempt to find potential borrowers on your own merit by networking with local real estate investors, doing so can be a long, arduous search. In addition, you would need to do your due diligence and assess the borrowers’ creditworthiness, along with their track record of completing successful real estate projects. This helps to minimize the risk of default.

If you don’t have the time or the knowledge to find borrowers independently, you can streamline the process by working with an experienced private lending professional like NorthLend Financial. Our firm has a robust review process and only works with qualified borrowers to ensure a successful lending experience.

Finding a Trustee

When lending your RRSP funds to real estate investors, you must involve a trustee to administer the funds. This trustee will act as a third-party administrator of the assets and ensure that the lending process fully complies with RRSP regulations. Responsible for holding and distributing the funds, the trustee may also provide additional services like loan administration, borrower credit checks, and default management.

Finding an experienced trustee can help streamline the lending process and fund management, so evaluating the trustee’s reputation, experience, and fees is critical before making the final decision. Alternatively, you can simplify the investment process by working with a dedicated financial institution specializing in mortgage administration.

Open a Self-Directed RRSP Fund

Next, you would need to work with a financial institution or brokerage to open a self-directed RRSP fund. With this type of account, you have greater control over your investments, with the ability to invest in a wide variety of assets, including loans and private real estate.

Importantly, you would also need to register your self-directed RRSP fund with the Canada Revenue Agency and ensure it complies with RRSP regulations.

Conduct Research

While lending your RRSP funds to real estate investors can be a lucrative endeavour, doing research and conducting thorough due diligence at every step of the process is of the utmost importance. 

Due diligence involves researching potential real estate investors and evaluating their creditworthiness, track record, and investment strategy. In addition, when choosing a trustee to administer your RRSP funds, reviewing their reputation, experience, and any fees involved is paramount. Finally, you’ll need to understand the full scope of the lending process and potential risks associated with private real estate investment. These include but are not limited to market volatility and borrower default.

For many, the research phase highlights the challenges associated with using your RRSP funds to invest in real estate by yourself. This tends to be far more work than one person can handle, which is where NorthLend Financial comes in. Our extensive experience and dedicated customer service ensure you can invest with peace of mind, knowing we do the heavy lifting.

 

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Coins stacked on top of each other with a house resting on top of a persons hand.

Is Using Your RRSP For a Down Payment a Good Idea?

In addition to investing your RRSP funds into private real estate through a private lending company, you may use the funds to purchase an investment property yourself. However, using your RRSP savings as a down payment requires selling your qualified investment assets and withdrawing cash. The main drawback of this approach is that these funds will no longer be tax-deferred, meaning you would be required to pay taxes on the withdrawn amount, even if you have retired already.

Generally speaking, using your RRSP for a downpayment is not the most efficient way to invest in private real estate. Here is why:

  • Withdrawal taxes. RRSP withdrawals are taxed as ordinary income. As a result, such withdrawals may push your income into a higher tax bracket, leaving you with a considerably smaller down payment than expected.
  • Opportunity cost. When selling your RRSP investments for cash, you are losing out on the opportunities associated with a continuously growing stock market.
  • Investment property taxes. While you don’t immediately need to pay taxes on your RRSP investments, investment property income will be taxed yearly. In addition, should you decide to sell your investment property, you would be charged substantial taxes.
  • Increased portfolio risk. Finally, pulling funds out of the stock market and investing them into a single real estate asset will reduce your portfolio diversification and can negatively impact your investment risk profile.

What About The Home Buyer’s Plan (THBP)?

Rather than directly using your RRSP savings for a down payment, you may wish to take advantage of The Home Buyer’s Plan (THBP). This federal program allows Canadians to withdraw funds from their RRSPs to build or buy a home for themselves or a specified person. Under The Home Buyer’s Plan, individuals can withdraw up to $35,000 from their RRSPs tax-free as long as they replenish the amount within 15 years.

In addition to THBP, the first home saving account (FHSA) can also be used to contribute to purchasing your first home. Keep in mind that these programs are designed for properties that will be your primary residence.

Using THBP to Buy Investment Property

The Home Buyer’s Plan program cannot be used to purchase an investment property, as it is meant to help Canadians buy or build their first home. However, you can look into different strategic avenues if you want to use your RRSP funds to purchase an investment property. At NorthLend Financial, we provide mortgage administrator services and private lending options to help bolster your portfolio. We work with you to understand your financial goals and determine the best way to invest your RRSP into an investment property.

Withdrawing from RRSP through The Home Buyer’s Plan

If you need assistance in buying your first primary residence, The Home Buyer’s Plan offers a great opportunity to use your RRSP funds for the down payment. If you do decide to take advantage of this program, you will need to:

  • Be a first-time home buyer. This condition does not have to be met if you are joining the program for a specified disabled person.
  • Sign an agreement to buy or build a qualifying home.
  • Be a Canadian resident between the date you make your first RRSP withdrawal under the THBP and the date you buy or build the home.
  • Occupy the home as your principal place of residence within one year after buying or building it.

Once enrolled in the program, each withdrawal you make will require a separate form, with the RRSP issuer filling out part of the document.

Final Word

Beyond question, using RRSP to buy investment property offers a range of benefits, including deferring taxes on rental income and capital gains until retirement. That being said, investing RRSPs into private real estate is easier said than done: simply withdrawing RRSP savings and using them as a down payment offers more risks than benefits. Even The Home Buyer’s Plan, which allows individuals to withdraw RRSP funds tax-free, is not suitable for purchasing investment properties.

Rather than spending your time and efforts working through the process of investing in real estate with your RRSP yourself, you could choose to work directly with real estate investors. However, not only would you need to find reliable borrowers and trustees, but you would also be required to conduct thorough due diligence and research to ensure a reliable return on investment.

The good news is that these are not your only options. Instead, you can simplify the process significantly by working with a dedicated mortgage administrator like NorthLend Financial. Our team knows the ins and outs of private real estate investments, and we do the legwork for you when it comes to finding qualified borrowers, ensuring timely payments, and dispersing returns. Whether you want to learn more about our process or are ready to get started on your real estate investment journey, get in touch with us.

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About Our Founder

Jason Anbara, Founder, CEO, and Principal Mortgage Broker, has been dedicated to realizing the homeownership dreams of countless clients through his mortgage services business. A distinguished graduate in International Management with Honours, Jason also holds a Bachelor of Commerce from The Telfer School of Management at the University of Ottawa.

Driven by a passion for his community and the positive influence his team has on both new and existing residents, Jason has garnered multiple accolades and awards. These recognitions underscore his unwavering commitment to providing exceptional customer service.

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