Using Your Registered Funds to Fund Your Mortgage and Buy Non-Bank Products

Put your registered funds to work for you. Our team put together a complete guide to funding your mortgage with RRSPs, including step-by-step lists, answers to all your tax questions, and real-life examples of how much you could be making.

Key Points

  • What Are Registered Funds?
  • How to Use Your Registered Funds to Fund Your Mortgage
  • Pros of Using Your Registered Funds to Fund Your Mortgage
  • Cons of Using Your Registered Funds to Fund Your Mortgage
  • Important Considerations for Using Your Registered Funds to Fund Your Mortgage
  • 5 Steps to Using Your Big Bank RRSP to Buy Non-Bank Products
  • How Do I Get Started?

Most people don’t realize they can invest in private mortgage investment entities like mortgage investment corporations and mortgage trusts, as well as mortgages directly, with their RRSPs. Interested in learning how to invest with your registered funds? We’ll walk you through it.

What Are Registered Funds?

A registered retirement savings plan (RRSP) is a type of Canadian account for holding savings and investment assets. RRSPs are the most popular and well-known registered plans in Canada. They’re established by individuals or often by individuals together with their employers.

RRSPs must comply with a variety of restrictions stipulated in the Canadian Income Tax Act. Approved assets include savings accounts, guaranteed investment certificates (GICs), bonds, mortgage loans, mutual funds, income trusts, corporate shares, exchange-traded funds, foreign currency, and labour-sponsored funds.

These are all called “registered” plans, meaning that they are recognized by our revenue authorities as tax-incentivised wealth management accounts. All of these plans are registered with the Canada Revenue Authority and are provided by approved service providers like banks, trust companies, and insurance companies. Contributions can be made on your own behalf or on behalf of your spouse up to and including the year you and your spouse turn 71.

Once money is deposited into an RRSP, the tax payable on that money (and any money that is earned by investing that money!) is deferred until it is withdrawn.

RRSPs have various tax advantages compared to investing outside of tax-preferred accounts. To encourage people to save for retirement, the Canadian government allows us to contribute a certain fraction of our yearly salary every year without taxing us on it today. Once money is deposited into an RRSP, the tax payable on that money (and any money that is earned by investing that money!) is deferred until it is withdrawn. You pay tax on it when you withdraw – either in a moment of need or at the time you retire. If you withdraw it before your retirement, then you will pay all the tax at once on the amount withdrawn. If you wait until you retire, you pay tax on it (and whatever has accumulated on it) gradually over a period of time until the funds are exhausted.

This applies to Registered Retirement Income Funds (RRIFs) and Tax-Free Savings Accounts (TFSAs) as well.

Did you know you can use registered funds to fund your own mortgage?

If you are making $100,000, the government will allow you to contribute 18% of your earned income (or a maximum of $27,230 for the 2019 tax year). If you make the maximum contribution, the government would only tax you on $72,770!

rrsp definition

How to Use Your Registered Funds to Fund Your Mortgage

To become both the lender and the borrower, you have to set money aside in RRSP accounts. The larger the RRSP, the more mortgage you can create. First, figure out how much of a mortgage loan you can create with the RRSPs you have on hand. (Your monthly RRSP statements will provide that number. Not sure? We can help!)

Those RRSP funds are likely tied up in mutual funds, exchange-traded funds, and other pooled RRSP eligible accounts. To fund a mortgage, these RRSP accounts have to be reduced to cash. Once you have made the decision to fund your mortgage with your own RRSP funds, you will instruct whoever has custody of your RRSPs to sell everything in the account so that the only thing that remains in the account is cash. If you remember one thing, make it this: IT IS IMPERATIVE THE CASH STAYS IN THE ACCOUNT. You are not withdrawing the cash; you are simply reducing whatever is in the account to cash.

When you reduce your RRSP account to cash to fund a mortgage, it is imperative the cash stays in the account. You are not withdrawing the cash; you are simply reducing whatever is in the account to cash.

Next, you will instruct your financial institution to open up a “self-directed RRSP.” It may be most expedient to work with the approved lender required in this transaction. The lender will require you to open an account, which will take very little time.

Once the account is established, you have to fill up your newly created self-directed RRSP account. You will do that with the assistance of the lender who has helped you set up the account. You will complete a “transfer instruction” whereby your lender will request all the other institutions who currently hold your RRSP accounts (that now hold nothing but cash) to transfer all the cash that is in those accounts to your newly created self-directed RRSP account. Once all the forms are completed, the transfer can take up to four weeks.

To maintain RRSP eligibility, funds must move directly from one RRSP account to another – regrettably, you cannot simply withdraw the funds and walk them across the street and deposit them.

Once the funds arrive in your self-directed RRSP account, it’s time for the fun part: telling the self-directed RRSP account to fund a mortgage! You do that by way of delivering to the lender a “payment direction,” which tells the lender to buy the mortgage from you on behalf of the RRSP account for the amount set out in the direction. The lender then forwards the cash to your lawyer, who will now register the loan against the land title to create the mortgage – the mortgage, now registered in the name of the self-directed RRSP and administered by the lender. The mortgage will have the benefit of insurance, most likely arranged by the lender approved to administer the mortgage.

Now you are set and you begin making payments on the mortgage as you would under any other mortgage arrangement.

Pros of Using Your Registered Funds to Fund Your Mortgage

  • You make interest payments to yourself instead of a financial institution, creating immediate cash flow.
  • The RRSP benefits from the interest costs. The longer the amortization period of the mortgage, the more RRSP you create.
  • Monthly mortgage payments that repay the RRSP loan with interest do not count as contributions and you can still take advantage of maximum contribution room.
  • It provides a low-risk investment with a predictable return.

Cons of Using Your Registered Funds to Fund Your Mortgage

  • Setting up and administering the RRSP is complex.
  • Insurance, legal and start-up costs, and administrative fees are high.
  • RRSP funds are tied up at the cost of other investment opportunities.
  • It may inadvertently over-concentrate your retirement portfolio in one investment product.

If your self-directed RRSP account buys from you a $200,000 mortgage that has a 25 year amortization period at a commercial rate of interest, you double it over the period without ever encroaching your contribution room!

Important Considerations for Using Your Registered Funds to Fund Your Mortgage

The mortgage, notwithstanding it is from you to you, has to be legitimate.

Many Canadians hold their RRSPs through “client-held accounts” at various investment and/or fund companies. Every time one opens an account with a different investment company or fund manager, a new account is created. These accounts are generally specific to the investment product being subscribed for at the time. It is not uncommon for Canadians to have several of these kinds of accounts.

The other popular form of account is a “nominee account”. Essentially this is one account held by a “custodian” or “trustee” that holds several different kinds of investments on your behalf. You need to employ a special kind of RRSP nominee account when you want to use your RRSP funds to finance your own mortgage – that account is called a “self-directed RRSP” and they are widely offered by financial institutions in Canada.

Two main takeaways:
1. The mortgage has to be insured by either CMHC or a private insurer. 2. The mortgage has to be administered by a lender approved by the National Housing Act.

what is an rrsp

5 Steps to Using Your Big Bank RRSP to Buy Non-Bank Products

  1. Confirm the non-bank product is RRSP eligible with the help of a licensed advisor like Fundscraper.
  2. Identify how much you want to invest in the non-bank product.
  3. Instruct your bank to reduce to cash that amount WITHIN your RRSP account – your account will thereafter have a component of bank product and cash!
  4. Open up a self-directed RRSP account.
  5. Transfer the cash component to the self-directed RRSP.
  6. Issue a payment instruction telling the self-directed RRSP what to buy.

How do I get started?

This investment strategy is less common, as only a very few can take full advantage of the substantial benefits it offers. Nevertheless, mortgage investment is an imperative in anyone’s portfolio. If you’re looking to engage in this strategy, it’s critical that you speak to a qualified financial advisor — like us! — before moving any money. Fundscraper can help you do an appropriate assessment of the risks and costs associated with this investment approach.

If funding your own mortgage is not an option available to you today, you still have other options. Join our community of investors to learn more about private property and mortgage investment, and how it fits into your portfolio and investment strategy.

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What Is an Offering Memorandum?

“Prospectus” and “Offering Memorandum” may sound like ancient Roman philosophers. But they’re actually documents that inform prospective investors about what’s being offered and on what terms. We put together an overview of what they include and how they function.

Key points:

  • What Is a Prospectus?
  • What Is an Offering Memorandum?
  • How Is an Offering Memorandum Regulated?
  • Eligible Investors vs Non-Eligible Investors
  • How to Start Investing Today

There are two ways for an issuer to raise capital in Canada: publicly or privately. When done publicly, a prospectus is used; when done privately, a term sheet or offering memorandum is used. In both cases, the purpose of the document is for the issuer to inform a prospective investor about the security’s history and credentials, what’s being offered, and on what terms. These documents simply tell a story. Let’s take a closer look at what they include and how they function.

What Is a Prospectus?

If you elect to raise money from the public, you have to use a prospectus. A prospectus is a highly detailed document that is prepared by an issuer together with its lawyers and auditors under complicated rules that govern our public capital markets. A prospectus tells the story of the issuer and why buying the securities of the issuer is a good investment.

The document is first filed with the regulatory authorities who will actually review the preliminary drafts to ensure it complies with legislation requirements. The regulators do not assess the worthiness of the investment; they simply assess whether the document provides the disclosure required by law. This document is generally the only document an issuer can use to solicit the public. There are severe financial and criminal penalties if an issuer fails to use a prospectus to solicit the public or uses it improperly.

For a new issuer, a prospectus can be hundreds of pages and cost in excess of a million dollars taking into account such things as legal, auditing, and printing expenses. It is extremely expensive to raise money under a prospectus. The advantage, though, is that anyone can purchase securities that are qualified for distribution under a prospectus.

exempt market dealer canada

What Is an Offering Memorandum?

If you elect to raise money privately, you often use a term sheet or offering memorandum. Both documents function to inform a prospective investor about the specifics of the investment.

A term sheet is an abbreviated soliciting document that carries significantly less regulatory burden than an offering memorandum. It’s a bare-bones, skeletal overview of a securities offering with just a summary and the terms of purchase and sale. And we mean bare-bones: By regulation, a term sheet can have no more than three lines of text to describe the business of the issuer!

An offering memorandum is a more robust document. It describes, in detail, everything a prospective purchaser needs to know about a security being sold so they can make an informed investment decision, including:

How Is an Offering Memorandum Regulated?

Instead of mandating the contents of offering memorandums, regulators put the onus on issuers to ensure the information they put before investors is accurate. How do they enforce it? By giving them the right to sue an issuer or cancel their subscription in the issuer’s security if a misrepresentation is found in the offering documents.

Wherever an offering memorandum is used, the issuer must (except in very limited circumstances) provide potential purchasers with various contractual rights of action and rescission for any misrepresentation. The actual granting of the right will often be found in the subscription agreement (the agreement by which one purchases the relevant securities).

An offering memorandum is supposed to provide “prospectus-like disclosure.” This often results in many prospectuses being hundreds of pages long and nearly indecipherable. When the offering memorandum is not required to be in a prescribed form, the rule of thumb is to provide the information that an ordinary subscriber of exempt market security would expect upon which a reasonable decision can be made. At the heart of disclosure, it must not contain (i) a misrepresentation or (ii) an omission that would be tantamount to a misrepresentation.

An offering memorandum is supposed to provide prospectus-like disclosure.

What Is the Exempt Market and What Is an Exempt Market Dealer (EMD)?

Instead of raising money from the public, an issuer may raise money privately in the “exempt market.” This is the most common route issuers take. Raising money from the private capital market is also governed by extensive legislation. What makes it easier is that a prospectus is not required.

The exempt market describes a section of Canada’s capital markets where securities can be sold without the protections associated with a prospectus. Examples of activity in the exempt market include:

  • Canadian and foreign companies, both public and private, selling securities to institutional investors and qualified investors
  • Canadian and foreign hedge funds and pooled funds selling securities to institutional investors and qualified investors

Investors who buy securities through prospectus exemptions generally do not have the benefit of ongoing information about the security they are buying or the company selling it. They also often do not have the ability to easily resell the security. There is a presumption that given the wealth or expertise of the investor, or the quality of the security for which is being subscribed, the extensive protections provided by the prospectus requirements are not necessary.

An exempt market dealer (EMD) is a firm that has been licensed to distribute investment securities that haven’t been qualified by a prospectus, but are exempt from the prospectus requirement based on the rules and regulations of each province where the EMD is registered to carry on business.

Exempt market pro: The cost saving is tremendous.

Exempt market con: An issuer is only permitted to solicit certain groups of investors — ones the regulators believe do not need the disclosures and provided by a prospectus.

Eligible Investors vs Non-Eligible Investors

An eligible investor is an individual who makes $75,000 (or makes a combined $125,000 with a spouse) in each of the last two calendar years and expects to make the same in the current year. Alternatively, an eligible investor is an individual who has $400,000 of net assets.

An eligible investor can invest up to $30,000 in any one calendar year and, if a securities dealer has determined it’s suitable, up to $100,000 in any calendar year.

A “non-eligible” investor is a person who does not meet this minimum requirement. As such, they may only invest up to $10,000 in any calendar year.

private placement memorandum real estate

How to Start Investing Today

Intrigued but still not sure where to start? Fundscraper can help. We’re an EMD registered to sell securities in the Provinces of Ontario, our Principal Jurisdiction, British Columbia, Alberta, Quebec, and Prince Edward Island. We recommend learning more about the Fundscraper Property Trust, a private investment vehicle that lets you invest in real estate with as little as $5,000.

Fundscraper has employed the rules of the exempt market to facilitate investment in the private real estate market. Our offerings are unique to Canada – Fundscraper is the only online investment platform today where anybody can learn about, become qualified to invest in, and actually subscribe for in a secure and transparent environment private real estate investment opportunities that have been vetted for consideration. Join our community of investors today and start growing your nest egg.

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You Should Invest in Commercial Real Estate

A building is not valued on its brick and mortar but its cash flow. It is the subtlety in commercial real estate investing that “cash flow” and, ultimately, the net operating income of a property that is the hallmark of its value. Welcome to our investing in commercial real estate for beginners!

Key Points

  • The cornerstone of a commercial real estate investment is the cash that is generated by the commercial leases entered into by tenants with the landlord. 
  • Whether it be for office or retail space, it is the cash after expenses generated over the long term from commercial properties  that attracts the savvy investor. 
  • A building’s value is assessed by the size of its net operating income relative to other buildings in its geographic area.

So You’re Interested in Commercial Real Estate Investing? (Canada)

We’ve spoken before often about the need for diversification in one’s investment portfolio. Diversification attempts to mitigate investment risk by spreading one’s investment eggs in more than one basket. This helps grow your nest egg to help achieve your retirement goals. We’ve also spoken about how private market investment in real estate property can anchor anyone’s portfolio against the unpredictable headwinds of the public markets. We’ve often touted the benefits of private real estate investment, whether it be in residential properties, through private mortgages, REITs composed of commercial buildings, investment funds, etc.

The cornerstone of a commercial real estate investment is the cash that is generated by the commercial leases entered into by tenants with the landlord. Whether it be for office or retail space, it is the cash after expenses generated over the long term from commercial properties  that attracts the savvy investor. A building’s value is assessed by the size of its net operating income relative to other buildings in its geographic area.

Commercial real estate investing in Canada has many unique elements that investors should consider when readjusting their investment portfolios.

Different Ways of Investing in Commercial Real Estate (Canada)

Determining relative value is a function of what we refer to as the “cap rate.” The capitalization rate is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. This measure is computed based on the net income which the property is expected to generate and is calculated by dividing net operating income by property asset value. It’s expressed as a percentage, i.e., the cap rate. It is used to estimate the investor’s potential return on their investment in the real estate market.  Established markets will determine cap rates for various market segments in various geographic locations at various times. It is a very fluid relative score of value. By mathematical operation, the lower the cap rate, the higher in value will be the cash flow and, in turn, the value of the property.

This is how we explain why a small coffee shop in Toronto’s Kensington Market is worth more than a vacant four storey building in Timmins, Ontario. There are lots of coffee shops in downtown Toronto. There is a regular market for folks buying and selling coffee shops. How much people are willing to spend to obtain a desired cash flow (and potentially a monthly cash flow) will be reflected ultimately in the sale price of the property. Therefore, if we divide the net operating income of a particular coffee shop by the purchase price, we arrive at the “cap rate.” When we do that repeatedly over numerous transactions in a given area, we will derive an approximate cap rate for coffee shops!

The lower the cap rate, the higher in value will be the cash flow and, in turn, the value of the property.

Let’s presume the cap rate for a coffee shop in downtown Toronto is 6%. This is actually a low cap rate suggesting that the coffee shop business is pretty lucrative. The coffee shop we want to buy is in a dilapidated house on a postage stamp size piece of real estate in a crowded corner of the market. It has an annual gross income of $300,000, less expenses (including property taxes) of 40% leaving us an annual net income of $180,000 per year. If we take the net income and divide it by the cap rate, the value of the property is $3,000,000! We don’t care what the house is worth; it’s the cash flow!

Our vacant four storey commercial building with thousands of feet of commercial space in Timmins, Ontario, has no income. Though the brick and mortar of the four storey commercial building may represent a million dollars of construction material, if it is not generating income, it’s worth is only the land and the salvage costs of the building.

Therefore, good commercial real estate investment is all about cash flow. And there are a variety of ways of getting into good commercial real estate. Real estate investment trusts (REITs) are the favourite way most Canadians invest in commercial real estate. Actually buying office space and letting it out on a “triple net lease” basis (i.e., the tenant is responsible for ALL costs of  the space) is one way a few individuals of high net worth enter the property market.

Good commercial real estate investing is all about cash flow.

Learning How to Invest in Commercial Real Estate the Smart Way

  1. Solid return over the long haul: Investors in commercial real estate typically receive steady cash flow for their investments, with income generally distributed annually, quarterly or even monthly. That’s because high occupancies and predictable rents often provide the steady cash flow that most investors are looking for. In North America over the last 25 years, average return in private real estate investment has hovered around 10% (National Council of Real Estate Investment Fiduciaries (NCREIF))
  2. No correlated asset: Private real estate investments do not correlate with the public markets. Performance is not linked to publicly traded stocks or bonds.
  3. Commercial real estate is a tangible asset: You can visit it, walk through it, run your hand over the walls. It’s real, and you own it.
  4. Leverage: Commercial real estate can be leveraged. The acquisition, in part, can be financed with mortgage debt, or, if the equity in the property is available, can be leveraged for other investments.
  5. Tax advantages: There might be unique tax advantages acquiring commercial real estate. If one has purchased well-located properties, those properties should go up in value over time. Yet, for tax purposes, one can depreciate the value of the buildings over time, which helps to reduce yearly taxable income. The net effect is that the investor is depreciating for tax purposes what should turn out to be an appreciating asset for investment. Not many asset classes provide this benefit.
  6. Inflation hedge: Commercial property investment is a common inflation hedge. As inflation forces prices rise, so do commercial leases as property rents can be repeatedly adjusted to with inflation. All other things being equal, the return on stocks and bonds will actually diminish in an inflationary environment.

Commercial real estate investment is not the type of investment for all real estate investors. We encourage people who want to learn more to pick up commercial real estate investing books and discover what the pros know. Anything that delivers a solid predictable return, is a non-correlated asset, is tangible, and has possible tax advantages is definitely worth a glance.

Start Investing in Real Estate Backed Investments Today

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Fundscraper Property Trust – The Village at Thunderbird Webinar

During this Covid-19 period, Phoenix has become the number one growth market in the US for appreciated home prices. During this webinar, we learned from Sud Group, leaders in the multifamily investment space, why they see the Arizona market as the current and future growth story of our time.

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The contents hereof are for educational, informational and illustrative purposes only and may change in the future. Copyright in such content is owned by Fundscraper Capital Inc. (“FCI”) and no user may sell, republish, modify, or distribute all or any part thereof without written permission. The views expressed by any speaker, author or participant, are their personal views and not those of FCI, an Exempt Market Dealer, registered with the Ontario Securities Commission (and equivalent regulators across other Canadian jurisdictions), or its affiliates. Any content is not intended to provide, and should not be relied on for investment, tax, legal or accounting advice. Nothing in any presentation shall be construed as a recommendation or offer to sell, or a solicitation of an offer to buy any securities. The information presented may consist of investment opportunities that include projections and forecasts based upon information, including forward-looking assumptions and estimates. There can be no assurance or guarantee whatsoever that this information is accurate, complete or fair and any projections and forecasts  will be achieved. Historical performance is not necessarily indicative or a guarantee of future results and investments may be illiquid. You should refer to the offering documents contained within each investment opportunity for full details including risks relating to such opportunities. All securities involve speculation and a degree of risk and could result in partial or total loss of your investment. In addition, you should consult with your investment advisor and other professionals, including legal and tax, before making any investment. FCI may be a “related” issuer (as such term is defined in National Instrument 33-105—Underwriting Conflicts) of a party offering securities mentioned in this presentation and in some cases may receive a referral fee or other compensation therefrom.

Earn Cash Flow & Build Wealth Through Real Estate with District REIT

Passive income real estate is known as one of the best ways to gain an additional source of revenue, attain security in retirement, and ultimately design a roadmap to achieving financial freedom.

However, passive income real estate investing is not necessarily the right fit for every investor. Would you like to take a more active role in real estate investing or a relatively passive role?

Learn all about passive income real estate, and see whether or not it sounds like a good fit for your investing personality type.

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The contents hereof are for educational, informational and illustrative purposes only and may change in the future. Copyright in such content is owned by Fundscraper Capital Inc. (“FCI”) and no user may sell, republish, modify, or distribute all or any part thereof without written permission. The views expressed by any speaker, author or participant, are their personal views and not those of FCI, an Exempt Market Dealer, registered with the Ontario Securities Commission (and equivalent regulators across other Canadian jurisdictions), or its affiliates. Any content is not intended to provide, and should not be relied on for investment, tax, legal or accounting advice. Nothing in any presentation shall be construed as a recommendation or offer to sell, or a solicitation of an offer to buy any securities. The information presented may consist of investment opportunities that include projections and forecasts based upon information, including forward-looking assumptions and estimates. There can be no assurance or guarantee whatsoever that this information is accurate, complete or fair and any projections and forecasts  will be achieved. Historical performance is not necessarily indicative or a guarantee of future results and investments may be illiquid. You should refer to the offering documents contained within each investment opportunity for full details including risks relating to such opportunities. All securities involve speculation and a degree of risk and could result in partial or total loss of your investment. In addition, you should consult with your investment advisor and other professionals, including legal and tax, before making any investment. FCI may be a “related” issuer (as such term is defined in National Instrument 33-105—Underwriting Conflicts) of a party offering securities mentioned in this presentation and in some cases may receive a referral fee or other compensation therefrom.

The New Mortgage Syndication Rules For Non Qualified Syndicated Mortgages

The Ontario Securities Commission (OSC) and the Financial Services Regulatory Authority (FSRA) recently released proposed changes to the new rules for mortgages. If you’re an existing mortgage syndicator promoting non-qualified syndicated mortgage (NQSM) investments, you’ll either think it’s very good news or very bad news. We’ll walk you through the proposed changes.

Key Points

  • The regulators have divided the market by class of subscribers. If your class of subscribers generally meet the definition of a Permitted Client then you’re in luck! It will actually be easier for you to carry on your business than it was before the material changes made to the regulations in July 2018 when the Form 3 disclosure was introduced.
  • Fundscraper is able to show syndicators how they can continue profitably in business and give them the comfort that between them and the regulator stands a seasoned platform that will shield them and provide protection for their investors. 

How is the NQSM market changing?

Section 31.1 of Regulation 188/08 has been deleted in its entirety and with it the burdensome disclosure regime that brought to a halt the NQSM market. There are no longer prescribed deliveries or mandated disclosures to Permitted Clients not individuals. Initial disclosure requirements are minimal. In other words: Permitted Clients can be trusted to take care of themselves.

Under this new regime, FSRA has made every effort to facilitate and make efficient capital market investment in the NQSM by Canada’s biggest stakeholders.

Who qualifies as a permitted client?

There are 18 categories of Permitted Client. The obvious ones are charter banks, trust companies, dealers, and the like. The three most commonly used categories in the retail market are:

  1. An individual who beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5 million
  2. A person or company that is entirely owned by an individual(s) referred to in the above paragraph, who holds the beneficial ownership interest in the person or company directly
  3. A person or company, other than an individual or an investment fund, that has net assets of at least $25 million as shown on its most recently prepared financial statements

What are the pros of the NQSM market change?

The regulators have divided the market by class of subscribers. If your class of subscribers generally meet the definition of a Permitted Client then you’re in luck! It will actually be easier for you to carry on your business than it was before the material changes made to the regulations in July 2018 when the Form 3 disclosure was introduced. Additionally, there will be no need for additional registrations with the OSC as contemplated in earlier drafts of the proposed legislation.

What is the private capital market?

If you are not dealing with Permitted Clients or you are dealing with a mix of Permitted Clients and persons who are not, then you fall into the exempt market, aka the private capital market. The OSC will oversee all of your activities in connection with your investors and will require that you provide the same standard of care as it mandates for all dealers. FSRA will continue to oversee all of your activities related to your dealing in mortgages. So, like a dumbbell, the OSC will be at one end of your deal and the FSRA will be at the other!

What are the cons of the NQSM market change?

A big blow for many syndicators is the loss of the $60,000 investment limit. Under this exemption, anyone was permitted to invest up to $60,000 in a NQSM within a 12 month period. To capture those smaller investors, syndicators will now likely have to fall back on the offering memorandum exemption (and its supplement for mortgage syndication) to continue servicing these smaller investors. Under the new guidelines, investment limits are smaller and are subject to eligibility.

The syndicator will also have to be registered with the OSC in some capacity — and will be subject to the same standards of practice as all other security dealers subject to OSC oversight. They’ll likely be required to take the exempt market exam to demonstrate proficiency in exempt market placement, and will have to learn a new investing vocabulary.

Additionally, the syndicator will also now be reporting to the OSC. It is anticipated this may be a major irritant (and cost) for syndicators, though the OSC suggests that syndicators should be treated the same as all other issuers in the exempt market.

For more potential pain points, we outlined more major aggravations the new OSC rules might cause syndicators.

How can I work around the new rules?

Fundscraper is a mortgage syndicator’s solution. We’re registered with FSCO as a mortgage brokerage and with the OSC as an Exempt Market Dealer in the Province of Ontario (as well as British Columbia, Alberta, Quebec, New Brunswick and Prince Edward Island). We have spent the last three and half years perfecting our online compliance procedures with the full expectation of the changes happening today in the mortgage syndication market. We discovered that by creating an interactive online environment we can greatly reduce the costs of compliance while delivering best-in-practice solutions. Once we qualify investors, we apply computer generated algorithms to their investment decisions to assess suitability of investment and flag syndicated mortgage risks.

If you’re not thrilled about the new OSC rules, we can help.

Fundscraper is able to show syndicators how they can continue profitably in business and give them the comfort that between them and the regulator stands a seasoned platform that will shield them and provide protection for their investors. Having Fundscraper as a trusted ally helps put the mortgage syndicator back in business with far less administrative headaches. Contact us to get started today.

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Real Estate and Retirement Webinar

Are you not sure how long your retirement funds in your nest egg will last?

Retirement is a daunting prospect for many of us because we don’t know what our senior living expenses will amount to.

The benefit of investing in real estate during your senior years is that it may provide additional income from your retirement portfolio. Certain kinds of investments in real estate do generate income which can enjoy certain tax benefits.

Fundscraper Property Trust is an investment vehicle that allows Canadians to make equity investments into pooled mortgages. With a target return of 6-11% across our various pools, we harness the stable nature of real estate while providing the type of built-in diversification you would receive from a mutual fund, creating what we hope is an overall safer and simplified way to invest in real estate.

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Mortgage Investment Corporations for Mortgage Brokers and Agents

Mortgage investment corporations (MICs) have been around since 1973. MICs are a terrific vehicle for bringing like-minded investors together to collectively invest in one of Canada’s hottest investment products: mortgages!

Purchasing a mortgage is too expensive for many investors and may overly concentrate their investment portfolio in one asset class. MICs, however, mitigate those risks and add diversification. By bringing together several investors under one roof, the MIC can invest in more than one mortgage, distributing the risk among the members. The MIC can also distribute returns to its investors without making any withholding.

Any broker or agent seeking to create a MIC should seek advice and direction of a qualified lawyer. We put together an overview of the issues to keep in mind as you seek to create a MIC and/or advise your client to invest in one.

Key Points

  • Purchasing a mortgage is too expensive for many investors and may overly concentrate their investment portfolio in one asset class. MICs, however, mitigate those risks and add diversification. 
  • The Tax Act also deems a mortgage investment corporation to be a public company. The benefit of being deemed a public corporation is that the shares of a public corporation are qualified investments for registered plans, including registered retirement savings plans, registered retirement income funds, and tax-free savings accounts.
  • Every prospective investor should receive a suitability assessment, regardless of who they are or how much capital they have to invest.

Promoter (n): the person who organizes the MIC and promotes it to investors.

 

How to establish a MIC

The first step is creating a corporation, which you or your lawyer can do online with an approved service provider. After the company is incorporated, you will have to “organize” it by appointing directors and officers, establishing a registered head office, and putting in place a by-law.

In order to be considered a MIC under the Tax Act, it must have the following attributes:

  1. It must be a Canadian company
  2. It can only invest the funds of the corporation in mortgages that are secured against real property situated in Canada
  3. It cannot manage or develop property
  4. There must be at least 20 shareholders, with no one shareholder owning more than 25% of the issued shares of any class of sharers of the corporation
  5. At least half of the property of the corporation must be in cash, deposits, and mortgages secured on houses or on property included within a housing project
  6. Debt is within the limits set out in the Income Tax Act

What makes a MIC special is the treatment it receives under the Tax Act.

The Tax Act also deems a mortgage investment corporation to be a public company. The benefit of being deemed a public corporation is that the shares of a public corporation are qualified investments for registered plans, including registered retirement savings plans, registered retirement income funds, and tax-free savings accounts.

If the MIC fails to qualify in any one aspect above, it risks losing its tax status as a MIC and its shares will no longer be considered qualified investments. It will have to impose withholding, and shareholders will not be happy.

MICs are not publicly traded companies, so they can only raise money in the private investment markets under rules that govern raising private capital.

Who can invest in a MIC?

In Ontario, there are very strict rules about soliciting people to invest in a venture, including MICs. Raising money in the private markets is much less expensive than in the public markets, as one does not need to prepare and file an offering document (i.e., a prospectus) with the Ontario Securities Commission (the OSC). The most common way that a company organizes and brings in early investors is via the private issuer exemption.

To use the private issuer exemption, the following elements must be in place:

  • There must be a provision in the articles of the corporation (or an agreement among shareholders) that a shareholder cannot trade their shares without consent of the board.
  • There cannot be more than 50 shareholders, not including employees of the corporation.
  • Those 50 shareholders must have a pre-existing relationship with the Corporation, including: an employee of the Corporation, an accredited investor, or a spouse, family member, close personal friend, or business associate of a founder.

Once the corporation passes the 50 shareholder threshold, the corporation is subject to various reporting obligations related to raising capital. It is necessary that the corporation seek appropriate legal advice at this stage.

A mortgage broker or agent cannot invite just anyone to invest in their MIC; investors may only be from a select group and not members of the general public.

What is an accredited investor?

Many promoters of MICs will only allow accredited investors to be investors. An accredited investor is an investor with pre-existing wealth and/or substantial income who has the financial freedom to invest in whatever they please. Because of their financial situation, regulatory authorities don’t think they need the same protections as other investors.

Important considerations for investing in MICs

The Private Issuer Exemption requires the issuer/promoter to assess whether the investment is suitable for the prospective investor regardless of who the investor might be. However, the most common deficiency cited by the OSC when auditing the use of the exemption is the absence of such a suitability assessment. Without it, it’s difficult to determine whether the investment is appropriate for the investor.

It’s not surprising that issues/promoters have been found guilty under securities law for not (i) adequately performing their due diligence obligations and (ii) retaining the services of a registered dealer when selling their security. To avoid conflict (and hefty fines), the issuer/promoter should retain the services of a registered independent securities dealer to facilitate subscriptions in the MIC.

Every prospective investor should receive a suitability assessment, regardless of who they are or how much capital they have to invest.

Lending and the Mortgages Act

In the Province of Ontario, everyone who wishes to be a lender must be registered under the Mortgages Act unless they are otherwise exempt or have employed the services of a registrant under the Mortgages Act to perform those services for them.

MICs are not required to be registered under the Mortgages Act. MICs generally take advantage of a provision under the regulation to the Mortgage Act that provides a person or entity is exempted from having to have a brokerage license if the person or entity carries on business as a mortgage lender solely through a mortgage brokerage or a person or entity that is exempt from the requirement to have a brokerage license.

Working with MICs can be very good for everyone involved: the broker, the investor, the lender, and the borrower. For the mortgage broker or agent, it is imperative that the rules be followed carefully.

Eliminate Compliance Issues

Ensure your compliance is current and up-to-date with the latest regulations. Our experts help companies ensure compliance, improve performance and more.

Mortgage Syndication – What’s Going On?

Ontario has seen a lot of mortgage regulation changes in recent years. In 2018, the Canadian Securities Administrators (CSA) released a series of proposed changes that would see the OSC assume responsibility for the oversight of mortgage syndication in the Province of Ontario. Mortgage syndicators are waiting with bated breath to see what finally comes from the recent interventions of two competing regulatory bodies into their market. We’ll walk you through the latest developments.

Key Points

  • Previously, the regulatory environment was relatively light. Now, the first major proposed change is that mortgage syndications are no longer exempt from the Securities Act (Ontario). The mortgage syndicator will now only be able to choose between distributing the syndicated product in the (i) public markets pursuant to a prospectus filed and reviewed by the regulatory authorities (highly unlikely given costs) or (ii) private markets under the rules governing private placements.
  • The new rules are thought not to come into force until late in the Spring of 2019, if not early summer. It is further anticipated that the mortgage brokerage community will be given an extra year to comply.

Who are the mortgage syndicators and what do they do?

Mortgage syndicators are syndicated mortgage brokers who are regulated by FSCO. In Ontario, only syndicated mortgage brokers (and their agents) are allowed to deal in or advise upon mortgages. Given the proximity to the market, syndicated mortgage brokers are the natural syndicators. The job of the mortgage syndicator is to initiate, promote and organise the syndicate.

A syndicate, by definition, is a self-organised group of people. A syndicated mortgage is a mortgage where there are two or more persons acting as lenders. The lenders have a direct beneficial interest in the underlying mortgage.

It’s attractive to be part of a syndicate as the investor (who now becomes a lender) is sharing the risk of being repaid by the borrower with other investors/lenders of like mind.

What are the new mortgage syndication rules?

Previously, the regulatory environment was relatively light. Now, the first major proposed change is that mortgage syndications are no longer exempt from the Securities Act (Ontario). The mortgage syndicator will now only be able to choose between distributing the syndicated product in the (i) public markets pursuant to a prospectus filed and reviewed by the regulatory authorities (highly unlikely given costs) or (ii) private markets under the rules governing private placements.

Mortgage syndicators will likely do the latter, yet it won’t be without its challenges. It is expected that the OSC will impose a registration requirement that will require mortgage brokers to successfully complete some series of courses that will eventually evidence their competence to solicit and sell in the exempt market.

Mortgage Syndication

Why did the mortgage syndication rules change?

First, it was to harmonize the rules of mortgage syndication across the country. In Ontario mortgages are currently exempt from securities law and the oversight of the OSC. Once the changes are adopted, there will no longer be exemptions from securities law anywhere across Canada and the placement of mortgage security would have to comply with the rules governing the private and public investment markets.

Second, at the time the amendments were announced, the mortgage syndication market was in turmoil, leaving many inexperienced investors exposed to questionable deal offerings made into the market by overly aggressive promoters.

The new rules are thought not to come into force until late in the Spring of 2019, if not early summer. It is further anticipated that the mortgage brokerage community will be given an extra year to comply.

CSA changes vs FSCO changes

Within a month of the CSA announcing its changes, FSCO released its intent to overhaul the rules governing mortgage syndication. Rather haphazardly, FSCO unleashed a web of policies and procedures. Where the OSC thinks it may take a year or two to bring the mortgage brokerage community into line, FSCO thought a few months adequate.

Instead of adopting the seasoned approach of the CSA, FSCO created a one-size-fits-all solution from which no market participant is exempt. The ensuing confusion and the abrupt cessation of market activity was not surprising. The new rules were described at the time of their introduction as transitional, yet as at the date mentioned above, no one knows how long transition is going to be or to what degree the regulators are cooperating.

The new mortgage syndication rules became effective July 1, 2018 — the same day many syndicators governed by FSCO gave up business.

Mortgage syndicators have a choice: embrace the changes imposed by FSCO now, or wait and see what the OSC will require?

Mortgage syndicators are stuck between a rock and a hard place. Embracing the FSCO regulatory regime today will involve significant cost and client interruption. (Further, there’s no guarantee that once the OSC publishes its rules, the syndicator will not have to go back and revisit all of the work they just put in place.) However, if the syndicator chooses to wait it out, he or she will likely lose business. What’s the answer?

What should mortgage syndicators do now?

There’s a way to circumvent FSCO’S transitional rules: Retain a private market intermediary to carry out mortgage participation transactions that comply with the Securities Act (Ontario) instead of the Mortgages, Brokerages, Lenders and Administrators Act (Ontario).

In Ontario, private market intermediaries are referred to as exempt market dealers (EMDs). EMDs are fully registered securities dealers who engage in the business of trading in prospectus exempt securities (which soon will include syndicated mortgages), or any securities to qualified exempt market clients.

Whereas a syndicate is a self-organized group, an EMD will represent a group organized by a third party. In the area of mortgages, it is common to organize groups under mortgage investment corporations (MICs), mortgage trusts (Trusts), or limited partnerships (LPs) whose sole business is investing in mortgages. In any of these examples, the EMD is not selling syndicated interests of mortgages, but rather shares in a MIC, units in a trust or limited partnership interests in a limited partnership.

The mortgage syndicator can continue advising on mortgages, but the EMD is responsible for qualifying the investors and providing the independent investment advice that marks best practice for the OSC.

How Fundscraper can help

Fundscraper is registered with FSCO as a mortgage brokerage and with the OSC as an EMD in the Province of Ontario as well as British Columbia, Alberta, Quebec and Prince Edward Island. We have spent the last two and a half years perfecting our online compliance procedures with the full expectation of the changes happening today in the mortgage syndication market. We discovered that by creating an interactive online environment we can greatly reduce the costs of compliance while delivering best-in-practice solutions. Once we qualify investors, we apply computer-generated algorithms to their investment decisions to assess suitability of investment and flag common investment risks. A qualified investor can begin our process and complete a subscription within twenty minutes from the comfort of their own home.

At Fundscraper, we also enhance distribution by making available, if a client so chooses, a product offering to a much larger educated audience than the client would have access to alone. Fundscraper is able to show syndicators how they can continue profitably in business and give them the comfort that between them and the regulator stands a seasoned platform that will shield them and provide protection for their investors. Having Fundscraper as a trusted partner puts the mortgage syndicator back in business.

Eliminate Compliance Issues

Ensure your compliance is current and up-to-date with the latest regulations. Our experts help companies ensure compliance, improve performance and more.

How Real Estate Investments Earn Money

Investing in real estate is one of the smartest moves you can make, no matter what age or stage of life you are in.

Real estate investments can add diversification to your portfolio – and getting into the market can be as easy as buying a mutual fund.

If you’ve ever had a landlord, you probably don’t dream of being one: Fielding calls about oversize bugs and overflowing toilets doesn’t seem like the most glamorous job.
But done right, real estate investing can be lucrative, if not flashy. It can help diversify your existing investment portfolio and be an additional income stream. And many of the best real estate investments don’t require showing up at a tenant’s every beck and call.

In this article, we take a look at how real estate investments on our marketplace earn money.

Key Points

  • Real estate investments break down into two broad categories: debt and equity.
  • The main ways to make money are from asset appreciation and dividends from rents/interest payments.
  • There are several ways to invest in real estate equity investments, including direct investment, mutual funds, REITs, and investment platforms.

Debt vs. Equity

Real estate investments break down into two broad categories: debt and equity. Let’s first look at the differences between these two types of investments to begin to understand how returns are structured in the form of income or appreciation.

DebtEquity

Under a real estate loan, an investor lends money to a borrower (typically a buyer or real estate developer). 

The investor earns income for the duration of the loan usually at a fixed rate following a schedule of regular interest payments on the loan principal. 

A debt investment is typically less risky than an equity investment, but there are several factors that impact how risky each individual investment can be, as discussed below.

See Example Debt Opportunity Listing

An equity investment gives an investor ownership of a physical property. An equity investment entitles the investor to a claim on money earned from any appreciation earned by the asset when it’s sold. 

Appreciation returns are usually realized in a one-time payment, in the form of capital gains. An equity investment also gives an investor the ability to earn regular income from rental payments for the lifetime of the investment typically on a monthly basis. While equity investments enable investors to earn both income and appreciation, they’re often riskier than debt investments as we discuss below.

The main ways to make money are from asset appreciation and dividends from rents/interest payments.

How Real Estate Investments Earn Income

Is your primary investment objective Current Income? Both debt and equity investments can earn you consistent income. Let’s take a look at how.

Loan Interest Payments

A real estate loan investment is an arrangement in which an investor lends money to a buyer or developer who then pays interest on the principal lent. An investor earns a return in the form of income from the interest payment while the loan is repaid. Payments are often made on a monthly basis making them an appealing investment option for those seeking “passive” or “residual” income.

Debt investments can only earn income, but they offer the advantage of lower risk than equity investments do thanks to their senior position within the capital stack. This means debt investors receive their principal plus interest before an equity investor can realize any returns (apart from rental income potential).

Within the debt tranche of the capital stack, there’s a further division of seniority among the types of debt which determines loan repayment priority. Senior debt is unsurprisingly the most senior and therefore has the highest repayment priority. It’s followed by junior debt and mezzanine debt, and then the equity portion of the capital stack.

In addition to seniority, debt real estate investments can be secured or unsecured. An investor with a secured debt investment has the right to foreclose on a property in the event of loan default to recoup the value of their loan. Senior debt investments are typically secured positions, and other debt investments may be secured, but the terms can vary by investment.

Rental Payments

Equity investments can also generate their own income stream using rental payments. Traditional, or common, equity ownership gives investors the right to lease the property to tenants to earn income through rental payments.

Unlike a debt investment, which generally has a fixed rate of return over a defined lifetime, an equity investment generates rental income that can change over time, growing or shrinking in relation to market demand. Income potential is also based on occupancy rates, which can also vary for any given property. This means that equity investors may incur more risk to earn income, but they also have the potential to earn a higher rate of return.

Also, common equity investments don’t usually have pre-defined periods of ownership and can last indefinitely, giving an investor the ability to earn income until the property is sold. Real estate is a long-term investment, especially for equity investments, which gives investors the ability to earn significant income over time on a monthly basis.

Common equity ownership offers rental income potential, while preferred equity investments offer cash flow in a way that’s more similar to debt investments. Like a loan interest payment, preferred equity investments offer a fixed rate of return commonly referred to as “preferred return.” Due to its middle position in the capital stack, preferred equity investments receive payments until they’ve reached the agreed rate of preferred return after all debt investments have been repaid and before common equity investors receive their return.

How Real Estate Investments Earn Appreciation

There are several ways to invest in real estate equity investments, including direct investment, mutual funds, REITs, and investment platforms. The investment vehicle used to invest in an equity investment impacts how an investor receives their return as well as how and when it is taxed.

For example, an investor with a direct investment can collect their capital gains directly from the sale of an investment. On the other hand, an investor with an investment through a fund may realize appreciation from the sale of a property through a fund distribution or through an increase in the value of the shares that they own. Each option brings its own advantages and disadvantages, which can make each option more or less preferable for an investor, depending on their financial goals and resources.

Regardless of how you invest in real estate, at some point, a rigorous underwriting process, which evaluates the aspects of a potential investment property, is key. If you’re investing independently, the onus for that underwriting process will fall on your shoulders, whereas, if you’re investing through a fund or platform like Fundscraper, a team of experienced real estate professionals will handle the evaluation on your behalf.

No matter who performs the underwriting, this due diligence process plays a vital role in determining whether an investment opportunity is financially sound.

Evaluating Your Options

Common equity investments are easier to access than debt investments. Individual investors can buy an investment property and manage it on their own. However, due to the high sums of money, knowledge, and time commitment required for direct investment, individual investors are often limited in the number and types of properties that they can buy — and manage — on their own.

As with debt investments, pooled-fund investment options, such as mutual funds, REITs, and investment platforms, offer a way to invest small sums of money across several assets and asset types. Private equity funds are also available to accredited investors. While it’s more feasible for an individual investor to invest in a single-family home or duplex, a fund can give an investor access to investments across a wide range of commercial real estate in multiple locations at a fraction of the dollar investment size.

For instance, with Fundscraper, you can invest in opportunities with a target diversification level that matches your goals containing a mixture of assets across different geographies.

Fundscraper allows investors with small amounts of capital to get in on private real estate deals. Whether you are looking for cash flow now or let your money sit and grow over the long term, Fundscraper offers a wide range of opportunities including Real Estate Investment Trusts, Private Equity, Mortgage Investment Corporations and Mutual Fund Trusts with shorter and longer term horizons.

We welcome you to create a free profile and browse our marketplace. If you’d like to discuss your financial goals and your options with one of our licensed dealing representatives, fill out this short questionnaire and book your call today.

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