Playbook Vol. 2 – 5+1 Ls of Location: A Winning Way to Look at Location When Investing in Real Property

In another article, I shared with you some crucial insights that I have gained from analyzing and investing in prime real estate opportunities for more than a decade. In authoring “The Modern Playbook for Super Successful Real Estate Investing,” I drew on professional football as a metaphor with its on-field success rooted in scouting, leadership, and expert play-calling. Since then, star quarterback and master play caller Tom Brady has further proven my point with a seventh Super Bowl victory. Not to be ignored is a new generation of star play callers led by Josh Allen of the Buffalo Bills and Patrick Mahomes of the Kansas City Chiefs. 

Many members of Fundscraper’s investment community are interested in learning more about the thorough and comprehensive thinking behind my key “Go-To Plays.” And so, I have authored Volume 2 of the Playbook, delving into the more technical ins and outs of real estate’s big L: Location.

There’s more to assessing the location of an investment property than the literal physical location of the land. I’ll walk you through assessing the value and quality of a location based on the 5 Ls: LIQUIDITY, LEASEABILITY, LEVERAGABILITY, LENGTH OF TIME, and LOT DIMENSIONS.

The 5 + 1 L’s of Assessing Location

  1. Liquidity
  2. Leasability
  3. Leveragability
  4. Longevity 
  5. Lot Dimensions

+ Loss – Learn to Lose a Lot or a Little

1. Liquidity

Liquidity is a measure of how fast the asset can be liquidated or converted into cash. Indirect indicators of liquidity can be measured by transaction volumes compared to other sub-markets, or by looking at comparable properties within the same asset class and how long they remained on the market before a sale (i.e. “days on market”). Understanding the liquidity of the property or location can help you assess the demand/supply dynamic of the local area sub-market and, from a defensive cash flow perspective, determine how much excess class and interest reserve should be held. In order to avoid selling an asset at an inopportune time, you need staying power. The duration of staying power you need to hold the asset is a direct function of the liquidity of the asset.

Some will say how fast you can convert into cash is a function of price, but for argument’s sake, you want to understand liquidity when the price is at fair market value.

Keep in mind, just because a location may appear to be great, it doesn’t automatically mean it’s also liquid. Illiquid locations are not a bad thing, though it depends on your time horizon and cash needs in a downside scenario. Some investors who have time use the strategy of investing in illiquid markets, hoping for the longer term growth of the asset.

Summary indicators of liquidity:

  • Days on market
  • Sales to listing ratio
  • Absorption rate

2. Leaseability

The value of a property is in its ability to generate cash flow over the long term (an article about Discounted Cash Flow will be posted here). To determine how leasable a property is (i.e it’s “Leasability”), first consider the turnover of the typical tenants in the area (vacancy rates or occupation rates).

If you can lease it, excellent! You’re successfully extracting the largest source of return from holding real estate: the money earned from its rental income. If you cannot lease it, you’re effectively banking on the ability to sell at a higher value at some point in time in the future. And guess what? The best way to drive up the value of an asset is to maximize its income potential.

The underpinning behind this is how much capital expenditures (renovations, capital improvements) you as the investor will have to further invest in the asset to attract the appropriate tenants. This is a cost you should certainly incorporate into your projected return calculation that will likely impact the purchase price of the asset at initial acquisition.

How marketable a property is in attracting high value leases is also a function of capital spend in improving the asset. For example, having a bank as a tenant is great. But you’ll have to ensure the space can accommodate a bank vault with walls made of 3 feet of concrete. That is not a cheap build and can at times be an expensive improvement.

  • NOI / CAP Rate: you can hope for cap rates to compress, but you’re best off if the asset NOI can be increased over time.
    • Rent per square foot
    • Net effective rent
    • Occupancy rate
    • Vacancy rate

3. Leveragability

Real estate is one of the most capital intensive asset classes, so assessing the ability for you to use the asset to borrow and provide adequate security or collateral is an important indicator of value (i.e it’s “Leveragability”). It is important to strike the right balance between debt and equity and in doing so to use assets for maximum advantage. The willingness of banks or other lenders to finance the property is often based on the amount of leverage and is a solid indicator of the asset’s cash flow or capacity to generate cash flow. If an asset attracts only one bank (generally the most conservative lenders) to provide financing and leverage against a property, whereas another asset has four banks lined up to provide financing, then it’s probably a good location!

Banks in general will be more comfortable in lending based on these standard metrics:

  • DSCR (debt service coverage ratio): the ratio of how much cash flow the property generates relative to how much of that cash flow is spent on servicing debt.
  • LTV (loan-to-value): One way to look at the LTV is assessing if there is enough cushion to return your principal in a sale event. This is a simple calculation: (Total Debt registered on the property) / (Total appraised value of the property (as-is state or at future completion)) = Equity value.
  • LTC (loan-to-cost): I like looking at the LTC metric because it is an indicator of alignment with the borrower, as it is a measure of skin in the game by the borrower and is a good measure of leveragability during the development process but before completion of the asset.

4. Longevity

It’s the ultimate master play: Plan for the long term. Consider the length of time it will take to earn your return (ie. the “Longevity”) I am a proponent of long term investing, especially with land and building. Looking at the super long term returns of real estate, you’ll notice that most of your return is derived from the cash flow you are able to extract from the real estate (reference the Schulich study), i.e. rental income, as opposed to the portion of your return coming from capital gains. Remember, the emphasis is on INCOME and cash flow! So if you hypothetically held your real estate for 50–75 years, and you sold it, the return from the income every year is likely more than the return from just the gain on the appreciation of the real estate.

Looking beyond the short term will help you highlight important longer term factors that will impact the potential demand for the surrounding area. Does it require significant CapEx to maintain the duration of active use? Does the market area and community or municipal government have long term investments planned to improve the underlying infrastructure, and thus drive further economic or population growth and employment into the area?

5. Lot Dimensions

By lot dimensions, I mean the size of the land and the design and configuration of any buildings and improvements, existing or planned. For example, here’s a rough sketch of a low-mid rise building section accommodating an angular plane. Notice how the top floor steps back from the lower level floors. There are a variety of reasons why developers implement an angular plane, but it has a direct impact on potential density of the site and design.

That’s an example of needing to have sufficient depth of lot in the context of low-mid rise buildings.

High rise buildings are an entirely different topic, but according to the City of Toronto’s urban high rise design guidelines, the floor plate of the high rise tower is capped at 750 sqm. The podium however, can be much larger. How many floors is the podium? Anywhere from 4–6 floors. How much is one floor? Anywhere from 1–2 floors. How much is one floor? Depends on if it is commercial heights or residential heights. How do you measure the heights? Depends on floor to ceiling or floor to floor…

  • As you can see, it gets complicated. But these details don’t really drive the overall investment decision.
  • The bottom line? Pick a strategy and stick with it. But it has to be a strategy.

6. Loss – Learn to Lose a Lot or Little

Always plan for the extreme downside, don’t forget to do your due diligence.

When the odds are in a franchise quarterback’s favour, he doesn’t get comfortable or lazy; he still memorizes every play and executes every move according to plan, as practised. Even if all these variables to a good location line up, you should still cover yourself and do your diligence on other aspects of the investment.

One important thing you can do is play out the worst case scenario and ensure you can survive and carry the investment for a meaningful amount of time under those circumstances. And you definitely do not want to sell at the wrong time, so do what it takes to protect yourself and avoid the scenario of having to liquidate prematurely, including reducing your debt burden and/or bringing on capital partners. For more information, read “Ways to Diversify Your Real Estate Holdings.”

This leads us to the final principle around the 5 L’s of assessing location.You can’t always pick the winners; no recent Super Bowl champs are undefeated. You cannot expect to always win, and prices don’t just move in one direction. You must manage the downside, or risk mitigating such that you do NOT lose it all.

One of my favorite quotes from Sun Tzu, the ancient Chinese wartime political strategist philosopher and in his own right “quarterback”, is about managing the downside so you don’t collapse entirely:

Those who win well, don’t engage in wars;

Those who engage in wars well, avoid battles;

Those who avoid battles well, lose well;

Those who lose well, don’t lose it all.

The modern equivalent of this is to diversify, and to monitor your concentration.

The Bottom Line 

My 5 + 1 L’s are merely general guidelines for a winning way to assess the quality of a location. There are many other variables that matter as well: proximity to transit, walk score, surrounding retail amenities, availability of good educational institutions and community facilities, probability of realizing on the financial forecasts, market mechanics, competition, regulatory changes and policy, neighborhood demographics, government investment, etc.

It’s never too late to get into the game for the first time, modernize your strategy, or score more points.

While my updated Playbook is a great tool, our team here at Fundscraper is always around to assist with coaching and help you assess opportunities best suited for you.

Fundscraper uses leading edge technology to make it easy for qualified Canadians to invest in private real estate offerings using our proprietary platform. We are breaking down the barriers where historically, only the wealthiest few were able to participate.

We continue to revolutionize how people invest in real estate and, along with our investor community and issuer clients, do it based on data-driven investment decisions. Fundscraper does the heavy lifting for you, but at the same time leaves it to you to decide which investments to choose.

Start Investing in Real Estate Backed Investments Today

Explore the investments available on Fundscraper.

Playbook Vol. 3 – How Not to Invest in Real Estate

How Not To Invest in Real Estate

I’ve gained many crucial insights from more than a decade of analyzing and investing in prime real estate opportunities. When I put together the “Modern Playbook for Super Successful Real Estate Investing”, my goal was to arm you with “go-to plays” designed for success. Now, I want to follow up with what NOT to do.

These days, the number one thing people ask me is what NOT to do. For every investing “do,” there’s also a “don’t.” My professional football metaphor works here as well: There are certain things that lead teams to success, and certain things they must avoid if they want to win. Every winning team has a strategy for success – it takes discipline, dedication, and discomfort to reap the rewards of a winning strategy. In addition to knowing what works, it is also important to know what doesn’t work.

As the Fundscraper investor community is interested in learning more about what not to do, I decided to compile Volume 3 to the Playbook delving into the don’ts of investing in real estate. If Volume 1 of the playbook explains how to invest in real estate, Volume 3 tackles how NOT to invest in real estate.

These are 5+1 rules that set broad parameters and help investors insulate their portfolios from the bad apples. At Fundscraper, we follow these rules and that’s how we have helped our investors achieve an average return in excess of 7-10.0% over the last three years.

1. Don’t rely on only one metric. Define your baseline

Don’t rely on only one metric. Define your baseline and look for correlating data variables to reduce your own or others’ biases on that single metric

Sometimes investors are too attracted to one metric, often the rate of return. Risk and return go hand and hand so when looking for corresponding data points that provide more context for a rate of return, assess the additional risk metrics that drive why the return is higher.  Risk in this context is the potential for principal erosion or losses to occur.

For example, if you see a mortgage paying a high interest rate of 16%, look at the: 

(i) Loan-to-value (LTV) ratio

(ii) Local employment trends, employment drivers (industrial sectors), 

(iii) Population growth, income growth

The loan to value ratio (include link to reference the LTV definition in our dictionary guide) is a measure of indebtedness against the total value of the asset.  The higher the ratio, the higher the indebtedness and thus, the higher the risks! The higher return metric should provide the investor with a premium sufficient to compensate for this higher risk.  

Another example:

If a rent roll shows very high rental rates, over and above market rates;

Look for the components of what determines a typical rental rate in a lease:

(i) Lease Term

(ii) Tenant inducements or cash incentives

(iii) Gross, base, percent rent, and net rents as well as common area maintenance (CAM) or other allocated costs such as Taxes, Maintenance and Insurance (TMI).

A very high rental rate but a very short lease term doesn’t really provide the stability of rental income one would expect from an investment property. Similarly, understand the components of the rental rate and whether or not that rate includes CAM, TMI or other components that might not be predictable, such as percentage rents.  

Tenant inducements are inducements typically found in commercial leases where landlords provide a lump-sum cash incentive to assist the retailer with the costs of locating to the retail unit.  As you can imagine, the larger the inducement, the easier it is for the tenant to pay a higher rental rate, but this doesn’t always serve to provide a higher return to the landlord.  The tenant inducement expense can be amortized over the life of the lease, but if the tenant can no longer pay a high rent for the entire duration of the lease, then that tenant inducement expense may never be recoverable.  High churning tenants should not receive high tenant inducements.

Have alternative baseline metrics for relative comparisons:

  • LTC vs LTV
  • Public REIT yields vs Private REIT yield
    • Payout ratios and leverage ratios

2. Don’t use leverage if you don’t have corresponding income.

  • From the lender’s perspective this is called the debt service coverage ratio (DSCR)
  • Tool calculator

You have to assume the worst case scenario and assess whether or not you can continue holding your investment or the asset can sustain itself with its own cash flow.  If too much leverage is utilized, and too little income is available to support it, then the asset is at risk of being lost to its lenders. 

Lenders assess the ability for borrowers to pay based upon a debt service coverage ratio, meaning, how well the borrower’s income can cover or pay for the periodic debt payments.  So if a borrower’s asset income is $150.00 / month, and the debt payments are $75.00 / month, then the DSCR is $150.00 / $75.00 = 2.0x. Somewhat adequate to cover at least the debt payments.  As an investor, you should look to ensure the residual excess cash can cover the costs of operating the asset as well.

3. Don’t assume the market by itself will drive asset values up

Have a value add strategy 

  • Renovation plan
  • Capital Expenditure (CAPEX) investment plan
  • Income growth plan

An asset that doesn’t provide the opportunity to add value through active management gives you additional avenues to increase asset value and correspondingly, more room to absorb potential value swings driven by the market. 

Buy low, sell high; is now, Buy low, add value, sell higher. 

If you don’t have the opportunity to add value, the risk is buying too high a price point, if the market doesn’t go in the direction you want it to, then you expose yourself to additional risks.

4. Don’t rely on only one exit strategy

Have multiple exit strategies either through a refinancing, buyout, sale, sub-division, etc.

5. Don’t focus on the short term

In fact, ignore the short term. If you have to focus on the short term, don’t get in the game.

  • Focus on the long term as real estate capital values take time to increase.
  • Focus on the income capacity of the assets.
  • Returns from real estate over the course of history, are mainly from the income extraction, not through capital gains. So you should expect to invest that way since that will be how your returns will be achieved.

6. Don’t forget to ask “why” at least 3 times to substantiate the trend or direction

  • Why does this investment make sense?
  • Why will the market continue to go in the trend you are seeing?
  • Why will growth continue?

And don’t be too optimistic.

Look at the sponsor’s / borrower’s various data points:

  • Track record
  • Mgmt. quality
  • Scoring sheet

Don’t forget about the don’ts.

Don’t invest beyond your risk tolerance. As in football, don’t always go for the touchdown pass or throw a Hail Mary pass. Consistent short yardage gains are likely to pay off. 

While my updated Playbook is a great tool, let Fundscraper do the coaching to help you select the winning opportunities best suited for you.

Fundscraper uses leading edge technology to make it easy for most Canadians to invest in private real estate offerings using our online platform. We are breaking down the barriers where only the wealthiest few were able to participate historically.

We continue to revolutionize how people invest into real estate and, along with our investor community and issuer clients, do it based upon data-driven investment decisions. Fundscraper does the heavy lifting for you, but at the same time leaves it to you to decide which investments to choose.

Start Investing in Real Estate Backed Investments Today

Explore the investments available on Fundscraper.

What is an Accredited Investor in Canada?

Before we define accredited investors, it is important for you to understand what the exempt market is. The exempt market is where securities are sold (under prospectus exemptions) without the protections that come with a prospectus. A prospectus is a document that outlines info about a security and the company or issuer that is offering it. 

There are a number of prospectus exemptions and each one has its own rules as to who can sell and buy securities under these exemptions. One of these exemptions is the Accredited Investor Exemption. As an accredited investor, one gains access to a wide network of private investment opportunities with significant upside potential. So how do you determine if you are an Accredited Investor or eligible to invest in the exempt market under the other exemptions? 

The Ontario Securities Commissions or the National Instrument or NI 45 106 set the descriptions of an accredited investor in Ontario and other provincial securities commissions throughout Canada. These rules created advantages to investing in large-scale investments which are the driving forces of Canada’s future economic growth. To help you, we’ve outlined the qualifications for the individual Accredited Investor below. You may qualify as an accredited investor in Canada if you meet at least ONE of the criteria below:

Income

  • Your net income before taxes exceeded $200,000 in both of the last two years and you expect to maintain at least the same level of income this year; OR
  • Your net income before taxes, combined with that of a spouse, exceeded $300,000 in both of the last two years and you expect to maintain at least the same level  income this year;

Financial Assets

  • You alone or together with a spouse, own financial assets worth more than $1 million before taxes but net of related liabilities.

Cash, or certain investments such as public equity or bonds, would be considered liquid/financial assets.

Net Assets

  • You, who alone or together with a spouse, have net assets of at least $5,000,000;

This criteria requires that an individual have net assets that count for at least $5 million, with liabilities subtracted. This means that an investor with $4.5 million in real estate and $500,000 in cash may be considered an accredited investor.

Investment Opportunities for Accredited and Non-Accredited Investors

Exempt market securities offer investors more choice of products to help them achieve their financial goals, but they should be aware that there are many risks associated with investing in the exempt market. 

Real Estate Investment Corporations 

A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping centers, hotels and commercial forests. Some REITs engage in financing real estate.To learn more about Private REITs click here. 

Mortgage Investment Corporations

Mortgage investment corporations or MICs allow investors to pool their money and provide loans to individuals and companies that were turned down by conventional institutions including banks, credit unions, and big lending companies usually at a slightly higher rate with varying loan periods. At least 50% of its assets should be in physical real estate, most of which include high-yield, residential mortgages.

One of the most appealing elements of participating in a MIC includes the typically stable and robust dividend rate that they provide to their shareholders while providing participating shareholders with mitigated risk through diversification. To learn more about MICs click here. 

Investing with Fundscraper

As Canada’s leading private real estate investment marketplace, Fundscraper has customized investments to potentially match your desired income and investment targets

Our goal is to help everyday investors access a world of new wealth that has historically been available to only a small portion of the population. Our easy-to-access online platform allows you to start investing in real estate backed securities with as little as $5000. 

Our team has helped process more than $475M (as of June 30, 2022) in investor capital into high value real estate-secured investments. Join today. It’s time to get your money working for you to produce real results and enjoy the benefits of investing in real estate.  

4 Benefits of a Private REIT

What is a Private REIT?

A Private Real Estate Investment Trust or REIT is a tax-efficient vehicle that gives people exposure to a diversified portfolio of income producing properties. Essentially, that means a REIT is a type of investment that allows almost anyone to invest in real estate and indirectly own or finance properties. 

Unlike a public REIT, private REITs are sold to investors through specialized dealers in the exempt market like Fundscraper. Private REITs are not traded on a public stock exchange and not required to file a prospectus with the Securities Exchange Commission. 

Additionally, there are transfer, redemption, and resale restrictions on those units. Thus, private REITs are not as liquid or transparent as publicly traded REITs on stock exchanges.

REITs are companies that own real estate assets like apartment buildings, office buildings, and shopping centres. When you invest in a REIT, you pool your money with other investors (known as ‘unitholders’) to become a part owner of the trust vehicle. 

As a unit holder, you are entitled to the cash distributions derived from cash flow generated from the trust’s holdings of real estate.

The Difference Between REIT and Real Estate Private Equity

A private REIT offers Real Estate Private Equity and Land Development Limited Partnerships. These are both securities that are offered in the exempt market and distributed primarily by way of an offering memorandum (OM). 

They may only be purchased by certain investors who qualify for exemption (e.g. accredited investor exemption, eligible investor under the offering memorandum exemption, etc.). 

For example, to qualify as an accredited investor, one of the conditions is that your income must be more than $200,000 per year, or a joint salary of $300,000, in each of the past two years and expected to reasonably keep the same level of income. 

Under these exemptions, individuals can invest in asset classes traditionally dominated by institutional investors like hedge funds and the ultra-wealthy. 

A land development limited partnership (LP) is a security offered to investors to provide them with the opportunity to invest in land development projects versus how a Private REIT enables investors to access a portfolio of income producing properties. Thus, how it works and the risks involved are very different. 

To see if you are eligible to invest in private REITs, sign up for a free account today and fill out our quick questionnaire to determine your investor eligibility. 

The Private REIT Structure

Let’s break down how the private REIT structure in Canada works. The REIT’s assets can be directly owned by the REIT or through a “special purpose vehicle” (SPV) or through a holding company (holdco) that, in turn, holds such SPVs.

SPV

A SPV is a company in which either a REIT or holdco, holds or proposes to hold, an equity stake or interest of at least 50%. The SPV holds at least 80% of its assets, directly in properties, and is not allowed to invest in any other SPVs nor engage in any activity, other than holding and developing a property and any incidental activity relating to such holding or development.

Holdco

A holdco is a company or or an limited liability partnership in which the REIT holds or proposes to hold an equity stake or interest of at least 50% and which, in turn, has made investments in other SPV(s), which ultimately hold the real estate property or properties.

The holdco does not engage in any other activity other than holding of the underlying SPV(s), holding of real estate or properties and any other activities pertaining to and incidental to such holdings.

4 Benefits of a Private REIT in Canada

Every real estate investment has its own set of risks. While reviewing private REIT offers, here are some of the important pros and cons to consider.

Pros
Stable and Tax Efficient Income
Private REITs can potentially offer target total returns ranging from 10-13% and cash yields from Most private REIT investments are relatively well diversified depending on their portfolio size and aim to provide reliable distributions:

One of the many government tax regulations requires REITs to pay out 90% of income to unitholders. In return, they’re generally exempt from paying corporate taxes on their earnings.

This helps distributions ‘flow through’ to investors and are only taxed once at the individual level instead of twice in typical corporate investment structures.

This flow through makes investing in private REITs tax efficient and beneficial for investors.
Diversification
If your investment portfolio consists of only stocks and bonds, you’re missing out on critical diversification from real estate investments.

Private REITs in particular have low correlation to the stock market and can be a hedge against inflation.
No Property Management
We often consider real estate a passive form of investing. However, if you buy a property and rent it out to a negligent tenant, it can be a huge time suck managing delinquent tenants.

Private REITs help you avoid being a property manager altogether with professional asset and property management.
Cons
Illiquidity
You can exit your holdings of a public REIT at any time (so long as the market is open), but it’s not that simple to liquidate your holdings of a private REIT.

Many private REITs are ‘closed funds,’ meaning you can’t sell or redeem units without penalty until a specific amount of time has passed – often a few years in the future or you have no ability to redeem units at all.

If you view real estate as a long term investment and don’t need your initial funds back in the short term, this might not be an issue. But if you foresee needing access to your funds, private REITs may not be the right choice for you at this time.
Lack of Control
Some investors prefer to have more control over their investments. Unlike when you buy a home and rent it out, as a unitholder of a REIT, you will have no say in what properties the REIT invests in and where they’re located.

While you don’t get to scope out the property first, you rely on the trustees and professional management will steer the course adequately.

Related to the above liquidity restrictions, you may not be able to control when you are able to redeem or sell your units.
Property and Asset Class Specific Risks
REITs tend to specialize in a specific type of property or asset class, such as an office building REIT will focus primarily on owning and acquiring office assets.

Each type of property has risks associated with it and is susceptible to different economic conditions, so it helps when your management team can focus on the same type of asset class across the whole portfolio.

If you’re interested in reviewing a private REIT list, download our Private REIT comparison chart here, which outlines all the available private REITs in our marketplace. 

How to Start a Private REIT in Canada

Are you looking at how to start a private REIT in Canada? Starting a private REIT is no walk in the park. Companies owning or financing real estate must meet a number of organizational, operational, distribution and compliance requirements to qualify as a real estate investment trust (REIT). 

These rules govern issues such as dividend distributions and the composition of a company’s assets. Starting a REIT is not simple but professional help is always available. 

Fundscraper is your trusted capital, compliance and technology dealer. 

As an Exempt Market Dealer (EMD), we help investors, issuers, private lenders, mortgage brokers, and mortgage syndicators navigate the complex legal landscape, and remain compliant with Canadian Securities Laws.

If you need any assistance with REITs in Canada, check out our Investment Marketplace or contact us today for more information.

What is a REIT in Canada?

If you’re considering real estate investment strategies such as direct property ownership and buying residential or commercial real estate properties, or you’re an experienced investor looking for further portfolio diversification, it’s a great time to consider alternatives such as  investing in Real Estate Investment Trusts, or REITs. 

REITs are an alternative way to invest into a portfolio of income producing real estate managed by real estate professionals. Investing in REITs can provide investors with regular cash flow in the form of distributions and potential for the underlying real estate owned by the REIT to appreciate in value. 

With the relatively recent popularization of REITs, it’s now possible to invest in a large portfolio of real estate assets that give you similar benefits as direct investing and property ownership.

If you’re a Canadian investor or looking into how to invest in a REIT in Canada, this article will answer important questions such as “What is a REIT?” and “How does a REIT work in Canada?”

What is a REIT and How Does it Work?

So what is a REIT and how does it work in Canada? A REIT is a tax-efficient vehicle that gives people exposure to a diversified portfolio of income producing properties. 

Essentially, that means a REIT is a type of investment that allows almost anyone to tap into the real estate market and indirectly own or finance properties.

REITs are companies that own real estate properties like apartment buildings, office buildings, and shopping centres. 

When you invest in a REIT, you pool your money with other investors (known as ‘unitholders’) to become a part owner of the trust vehicle. As a unitholder, you’re entitled to the cash distributions derived from cash flow generated from the trust’s holdings of real estate.

Every month, you’ll receive passive income via distributions made by the trust, generated from the income such as rental income earned from the properties. You don’t have to be anyone’s landlord or make any property visits; just leave it to the professional management teams that manage the trust. The REIT portfolio is managed professionally, with the managers appointed by the trustees of the trust.

Investing in a REIT can allow you to invest with less capital upfront than purchasing a property outright, thus broadening the access for individuals to own larger assets that are more geographically diverse.

How to Buy a REIT

Buying REITs is different from buying and selling stocks. There are different types of REITs, such as Equity REITs where the majority of income is derived from collecting rent or property sales or Mortgage REITs where income comes from loan interest payments. 

There are also publicly traded and private REITs. Public REIT units can be bought pretty much like shares of any other stock listed in the stock market. They can be bought as REIT mutual funds or exchange-traded funds (ETFs) through a broker.

Private REITs are sold to investors through specialized dealers in the exempt market like Fundscraper. Private REITs are not traded on a stock exchange, so there are transfer, redemption, and resale restrictions on those units. Thus, private investments are not as liquid as publicly traded investments.

Everyone’s investment preferences are different, but one of the main reasons investors prefer private REITs to public REITs is how their value is determined and the perceived stability of unit prices given typical lower correlation with the public capital markets. 

The value of a private REIT is generally based on the intrinsic and appraised value of the properties they hold, whereas the value of a public REIT unit may be severely impacted by the volatility of the public stock market. It will go up and down based on market events and may not be driven by the underlying value of the properties the REIT holds in its portfolio.

There also may be a liquidity premium for being traded on a public exchange, or vice versa, a liquidity discount for units of a non-traded REIT. 

Private REIT investments historically have a less volatile unit price, in part because units are not publicly traded. Most private REITs calculate and update their unit prices monthly or quarterly, whereas public REIT units values are real time based upon the unit price movement on the stock market.

Private REITs are a smart decision for some investors, but they’re not for everyone. Ultimately, it’s up to you to decide what investments are suited to your needs. 

Fundscraper can help you evaluate private REIT opportunities posted on its platform and make suitability suggestions based on your income, goals, and risk appetite. Empowering investors to grow their wealth in real estate is our passion. We offer an experienced management team, rigorous due diligence process, and first-class service.

Investing in a REIT in Canada

REITs overall are relatively new. The first publicly traded REITs in Canada were formed in the early 1990’s.

Nobody expects you to have developed an expertise in how to value a REIT. That’s what we’re here to assist you with! Fundscraper is licensed as an exempt market dealer with the Ontario Securities Commission and various other provincial regulators across the country. We have certain duties to you, and we take our jobs very seriously.

It’s our duty to assess whether an investment through our platform is suitable for you. We arm you with knowledge, help highlight what key considerations can impact your decision, and empower you to make decisions that meet your own personal investor profile given various key risk factors.

If you are looking to evaluate a REIT, a great place to start is by looking for a firm that has a track record and is licensed by a regulatory body, like a securities commission. You should ask to review all the relevant documents, any offering memorandum, financial statements, and always always seek professional advice from your accountants, lawyers, or other financial advisors.

Here are a few basic things to start looking at when evaluating a private REIT

  • Acquisitions and Dispositions: Is the REIT growing their portfolio? Are they shrinking? Neither one of these is inherently good or bad, but it’s important to make note of and understand why they took those actions and how the REIT is executing on its growth strategy.
  • Operating Margins: How are the operating margins performing compared against the peer group? Is management operating the portfolio efficiently relative to the competition? Operating margins is generally calculated as the Net Operating Income divided by the Gross Revenues.  
  • Distribution Yields (distribution per unit $ / price per unit): What they are paying out as distributions as a percent of the unit price is important to review over the course of time to be able to benchmark the comparative performance against other investment opportunities.

    This metric is very tricky since a lower distribution yield might mean units are fairly priced and a high distribution yield might indicate a discounted unit price.  It is important to see a consistent distribution on a total dollar basis (the numerator) and to understand why the unit price (denominator) is fairly valued or perceived to be riskier and thus discounted. 
  • Growth Strategy and Management Track Record: Has the management team executed well on prior strategic plans and does the management team adequately assess and address the risks of such strategic plans or objectives?

    Growth strategies don’t always have to be related to external acquisitions. Many private REITs implement value-add strategies to consistently upgrade assets, find new sources of ancillary income thus driving up rental income or make operations more efficient to reduce expenses.  

 

Download our Beginner’s Guide to Private REITs

A real estate investment trust, or REIT, is a company that makes investments in income-producing real estate. Investors who want to access real estate can, in turn, buy units of a REIT and through that share ownership effectively add the real estate owned by the REIT to their investment portfolios.

How to Start a REIT: Getting the Help You Need

Are you interested in learning how to start a REIT in Canada? Companies owning or financing real estate must meet a number of organizational, operational, distribution and compliance requirements to qualify as a real estate investment trust (REIT). These rules govern issues such as dividend income distributions and the composition of a company’s assets. Setting up a REIT is not simple but professional help is always available. 

Fundscraper is your trusted capital, compliance and technology dealer. As an Exempt Market Dealer (EMD), we help investors, issuers, private lenders, mortgage brokers, and mortgage syndicators navigate the complex legal landscape, and remain compliant with Canadian Securities Laws.

Need any assistance with REITs in Canada? Talk to us today.

Are Canadian Real Estate Prices Too Expensive?

Are Real Estate Prices Too High in Canada? Assessing Affordability in the Great White North

It’s one of the most common questions our investors and clients ask us: Are Canadian real estate prices too high? We put together a report to give an in-depth analysis with data and insights from our management team.

Key Points

  • How do Canada’s price to income ratios compare to other markets?
  • How does Canada’s population growth compare to other markets?
  • How does employment quality among Canada’s foreign-born population compare to other markets?
  • How does Canada’s household disposable income compare to other markets?
  • How do Canadians’ ability to sustain higher levels of debt compare to other markets?
  • How do Canadians borrow in the face of tighter Schedule A bank restrictions?
  • How can I learn more about private real estate investing?

Our community of investors asks us all the time: Are Canadian house prices too high? Is Canadian real estate pricing too expensive? These questions don’t have simple yes or no answers, so we put together a report on assessing affordability based on a number of factors to hopefully provide additional insight. Here, we outline indicative data that might point to some of the reasons why major urban centres in Canada still show a positive price trend, based on how certain factors compare to other markets.

How do Canada’s price to income ratios compare to other markets?

A good place to start when assessing affordability is the price-to-income ratio. The price to income ratio is the ratio between the price of a home and the annual household income in a particular area. Based on OECD data, when compared internationally, Canada may not appear to be an expensive real estate market. However, when compared to the G7 countries, Canada is currently the highest — in both price to income ratios and nominal housing prices.

How does Canada’s population growth compare to other markets?

Canada receives about 300,000 – 400,000 new permanent immigrants annually, making it the fourth-largest inflow in the OECD in absolute terms. This number is only expected to increase as the Canadian government raises the annual immigration intake, recently announcing a target of over 400,000 new permanent immigrants per year in the 2021-2023 Immigration Levels Plan. Overall, Canada has an annual population growth rate of 1.1% (0.35% in the USA), the 8th highest in the OECD.

More than 21.0% of Canada’s population is foreign-born — one of the highest in the OECD. For context, the USA has a foreign-born population of 13.6%.

How does employment quality among Canada’s foreign-born population compare to other markets?

Population growth attracts high-quality immigration, which makes up 70% of Canada’s population growth. Canada attracts quality immigrants, with approximately 60% falling under the ‘economic category’ admissions — these are people selected based upon their ability to establish themselves financially and economically.

In absolute terms, more than 69,700 people who became permanent residents of Canada in 2016 were ‘work’ or ‘economic category’ admissions. 

This increases the demand for housing from a productive segment of the population.

How does Canada’s household disposable income compare to other markets?

Canada has one of the highest growth rates in disposable income, driven primarily by high quality immigration equalling approximately 70% of the population growth.  Canada’s immigration is unique since over 60% fall under the ‘economic category’ admissions – people selected for their ability to become economically established. However, it is also important to assess household debt as a percentage of net disposable income, and Canada does not have the highest in the OECD.

How do Canadians’ ability to sustain higher levels of debt compare to other markets?

Generally speaking, the higher one’s education level, the more likely they are to remain productively employed and earn a stable income stream. Thus, the more likely they are to be able to sustain higher levels of household debt or have higher levels of savings. More than 64.4% of Canadians aged 25-34 and 50.0% aged 55-64 have a post-secondary education. Both age groups are the second-highest proportion in the OECD, just behind South Korea and Russia, respectively.

How do Canadians borrow in the face of tighter Schedule bank A restrictions? 

Financial policies determined by OSFI have been very proactive at managing household indebtedness, including higher down payment requirements, stringent stress tests for borrowers, and higher ratio tests to pre-qualify borrowers for mortgages. As Schedule A banks tighten restrictions, this creates opportunities for private lenders to offer financing solutions to a segment of borrowers that seems to be increasing in borrower quality given tighter and tighter restrictions. The above chart shows the impact of credit tightening and borrower loan quality.

 

References

 

How can I learn more about Canadian real estate markets and investing in private real estate?

We’re dedicated to empowering investors. If you’d like to continue discussing Canadian house prices or learn more about private real estate investments, visit our Education Centre at www.fundscraper.com. You can read helpful articles, watch informative webinars, learn about the latest market trends, and get all your questions answered. We also encourage you to sign up for our newsletter to stay up to date on the latest.

When you join our community, you’ll gain access to our most valuable resource: Us! (As well as accessing a variety of exclusive investment offerings. Our experienced licensed dealing representatives will be happy to answer all your questions as you continue on your journey of diversifying your portfolio into passive real estate investments.

 

Explaining RRSP Eligible Investments

What are RRSP-Eligible Investments?  

What investments are RRSP-eligible? 

RRSP-eligible investments are investments you can hold within your Registered Retirement Savings Plan (RRSP)

An RRSP is a type of personal savings plan registered with the Canadian federal government. You can contribute to this throughout your working years and accumulate funds to be used when you retire. 

By placing your income in investments within your RRSP, you invite the potential for it to grow. 

One of the benefits of doing this through an RRSP account is that these investments are tax deferred. You don’t pay tax on income earned through your RRSP investments until you retire or withdraw funds from the RRSP account, the taxes payable are then calculated based upon your current marginal tax rate at time of withdrawal.  

For individuals earning an income during their working years, you will likely be in a higher marginal tax bracket, so it makes sense to set aside savings in your RRSP account, invest it on a tax deferred basis, then withdraw it in your later years (such as when you have retired) in a lower tax bracket. 

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What Investments are RRSP-Eligible? 

Certain investments can be held within your RRSP. Eligible investments for RRSP include the following qualified investments:

CRA RRSP Eligible Investments:

  • Stocks
  • Bonds
  • Options
  • Mutual funds
  • Exchange-traded funds (ETFs)
  • Savings deposits
  • Treasury bills
  • Guaranteed Investment Certificates (GICs)
  • Some RESPs

What makes an investment “qualified”? 

The Canada Revenue Agency (CRA) decides which investments you can place within your RRSP. Generally, investment grade securities traded on a designated stock exchange, such as one in Canada, are recognized. Canada’s Finance Department assesses which stock exchanges are deemed Designated around the world. 

A foreign stock exchange such as the New York Stock Exchange counts, as well as about 46 other global exchanges. These include the Toronto Stock Exchange (TSX), NASDAQ, the London Stock Exchange, for example.

Explaining RRSP Eligible Investments

RESPs/RRIFs in Relation to RRSPs

In specific cases, RESP funds up to $50,000 can be placed in your RRSP. 

Your RESP must have been in existence for a minimum of ten years, and all beneficiaries must be 21 years old or older, and not pursuing higher education. If you don’t transfer your unused RESP money to an RRSP, you will be charged special tax on the interest earned from funds in the plan, plus an added 20%.

You can have an RRSP and a Registered Retirement Income Fund (RRIF) at the same time up until you turn 71. At this point, you must convert your RRSP to a RRIF, or some other form of retirement income. 

Want to Learn More About Saving Funds and How You Can Use Them? Read these Articles Today:

Some types of investments are not allowed to be held within your RRSP.

Prohibited investments that cannot be held within an RRSP, at risk of penalty as per Canada’s income tax folio include:

Ineligible RRSP Investments: 

  • Direct land
  • Employee stock options
  • Business investments in small business
  • Commodity futures
  • Investments/stocks within a private company in which you are a designated shareholder
  • Personal assets (jewelry/art)
  • Precious metals
  • Bonds issued by a wholly owned subsidiary whose shares are not publicly traded
  • Naked put and call options
  • Mortgage loans on a commercial property that’s owned by a relative
  • Bonds and debentures issued by companies with shares listed on a designated foreign stock exchange, even in cases where the company’s shares are eligible

To build investments RRSPs, contact nearby financial institutions.

 A bank or credit union can assist with making deposits of money into an RRSP, and both have a similar obligation to provide you with the most recent information.

eligible investments for rrsp

Ensuring Your RRSP-Eligible Investments are CRA Qualified 

Your banking or trustee institution can administer your RRSP for a fee. 

Professionals can advise you on which investments to include, annual contribution limits, deadlines, and more. You may also choose to self direct your RRSP. This means you determine which self directed RRSP eligible investments to place within your RRSP and control all decisions. 

In some ways, a self-directed RRSP can provide you with increased freedom and control of your finances, if you are dedicated to researching your decisions thoroughly. 

When determining eligible investments for RRSP, as stated above, you need to ensure what you choose is approved by the CRA. With rrsp eligible investments private companies promote such as securities, you must ensure what you select is traded on at least one global stock exchange that has been deemed a Designated Stock Exchange by Canada’s Finance Department. 

When searching for RRSP eligible investments CRA online, you can find a list of Designated Stock Exchanges on the Government of Canada’s website. Click and scroll down to find an alphabetized list of all Designated Stock Exchanges. Included exchanges are those within Canada, Europe, Brazil, Australia, New Zealand, parts of Asia, Jamaica, Bermuda, and South Africa. 

Getting Help with Your Eligible RRSP Investments 

At Fundscraper, we help you get to the most out of your RRSP investments. 

Many people are unaware it’s possible to invest in mortgages, private mortgage investment corporations, mortgage trusts and mutual fund trusts that focus on real estate assets, within your RRSPs. Private real estate can present an opportunity for diversification and capital growth. Our team takes into account your investment portfolio, experience, tolerance for risk, and needs and expectations to find the appropriate products for you to consider. 

In a few simple steps you can set up a self-directed RRSP to get started. 

Contact us today to learn more. Grow your future nest egg!

What is LIF?

Having the funds you need to support yourself in retirement is key to sustaining your quality of life after work. There are various ways you can fund your retirement in Canada, one of them being via a LIF. 

But what is a LIF? How does a LIF work, what can be placed in it, and how are funds taken out?

In this article, we will answer all of those questions and more.

What is a LIF? (LIF Meaning) 

A Life Income Fund (LIF) is a type of registered retirement income fund (RRIF) available in Canada. This type of fund can be used to hold locked-in pension funds and other assets for retirement. 

Some important characteristics of a LIF include the fact that:

  • LIF funds CANNOT be withdrawn in one lump sum
  • LIF funds ARE creditor-protected
  • In many cases, you MUST be of early retirement age to begin receiving LIF funds (55 years old)
  • You CAN choose your LIF investments
  • LIF contributions grow TAX-DEFERRED
  • There ARE legal limits to how much you can contribute/withdraw
  • You MUST start receiving LIF payments AFTER you turn 71
  • You NEED your spouse’s consent to set up a LIF as per pension legislation

LIFs are offered by institutions across Canada. Once funds are withdrawn from a LIF, they are subject to income tax. 

What is LIF?

The Meaning of LIF in the Investment Context 

The meaning of a LIF in an investment context is broad. 

Many jobs in Canada include a registered pension plan. Once you reach retirement, the lump sum value of your vested contributions to your pension plan, plus interest, must be unlocked in order to access the funds. 

How can you do this? Each province has an age at which you can begin to withdraw money from your pension. You can unlock your pension by converting the funds into a LIF, a locked-in retirement income fund (LRIF), a Locked-in Retirement Account (LIRA) also known as a locked-in Registered Retirement Savings Plan (locked-in RRSP), a Locked-in Retirement Savings Plan (RSP) or a Restricted Life Income Fund (RLIF). 

You may also unlock your pension by purchasing a life annuity

Your LIF can hold many types of investments including:

  • Cash
  • Securities listed on a designated stock exchange
  • Mutual funds
  • Corporate bonds
  • Government bonds
  • ETFs

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With your pension funds in a LIF, you can continue to grow your money while accessing it for life needs, over time. Depending on your province, you may have to purchase a secure guaranteed income in a life annuity at a certain age to use the money remaining in a LIF. This depends on where you live, however.  

In addition, if you live in Quebec, Nova Scotia, or Newfoundland and Labrador, you may qualify for something called temporary income as described by Sun Life.

With a LIF, you can control your investments, maximize your tax deferral and name a beneficiary as a recipient of your funds following your death. 

As a positive progression for your pension, a LIF presents a responsible way of dealing with pension income with the potential for growth over time. 

What is LIF: Understanding Withdrawal Amounts 

Why choose to place your pension in a LIF? 

With a LIF, as with other registered products, your contributions are allowed to grow tax-deferred when kept within the fund. In this way, a LIF can keep your investment retirement earnings tax-sheltered. 

You keep more money! In addition, LIF funds are creditor-protected. And as one of many registered products accounts available in Canada, having your money in a LIF can help reduce your taxes

In some circumstances, you can withdraw funds from a LIF at any age as long as they are to be used for retirement needs. These might include situations of non-residence, financial hardship, a shortened life expectancy or having a small account balance if you are 55 or older. 

At the time of this article’s publishing, pensions in federal jurisdictions like Alberta, Manitoba, New Brunswick and Ontario can be withdrawn once in a lump sum. In most cases, however, you cannot withdraw from a LIF before the age of 55 and it must be done gradually.

Meaning of LIF

Understanding the Meaning of LIF: Maximum and Minimum Withdrawal Amounts

It’s important to know that there are normally certain maximum withdrawal limits and minimum withdrawal rules for LIFs. 

The amount you can legally withdraw each year from your LIF is a percentage of your total fund. This fluctuates annually. This percentage is disclosed in the yearly Income Tax Act as information applicable to all RRIFs. 

Want to Become an Expert on Retirement Funds? Check Out These Articles Today:

So, how does it work? 

When you are ready to begin LIF withdrawals, you must specify how much you would like to take out at the outset of each fiscal year. The idea is that you withdraw funds within a certain limited range in order to receive lifetime LIF income. 

Many online platforms have useful LIF withdrawal calculators to help guide you through the process. 

Investing with Fundscraper  

As Canada’s leading private real estate investment marketplace, Fundscraper has customized investments to potentially match your desired income and investment targets

Our goal is to help everyday investors access a world of new wealth that has historically been available to only a small portion of the population. Our easy-to-access online platform allows you to start investing in real estate-backed securities with as little as $5000. 

Our team has helped process more than $420 million in investor capital into high-value real estate-secured investments. 

Join today. It’s time to get your money working for you to produce real results and enjoy the benefits of investing in real estate.

LIF Minimum and Maximum

With so many investment options for your registered account, you may be asking, Why should I care about private real estate investments?

The private mortgage market provides a fixed-income alternative for investors looking to diversify away from government bonds and corporate debt. It also provides the opportunity to generate a generally predictable yield compared to some traditional fixed-income vehicles in a low interest-rate environment.

If you’re new to the world of real estate investment, you probably have some questions about your options. Let’s walk through a popular type of registered retirement life income funds (RRIF) offered in Canada: the life income fund (LIF) as well as LIF minimums and maximums.

What are LIF Minimum and Maximum Withdrawals?

A LIF or life income fund is a type of registered retirement income fund (RRIF) offered in Canada that can be used to hold locked-in pension funds as well as other assets for an eventual payout as retirement income.

Owners must use the fund in a manner that supports retirement income for their lifetime. Each year’s Income Tax Act specifies the RRIF withdrawal amounts, including the LIF minimum and maximum withdrawal amounts.

You must be at least of early retirement age (specified in the pension legislation) to purchase a LIF and begin receiving payments.

Why is it Important to Know My LIF Maximum Withdrawal?

The Canadian government regulates various aspects of life income funds, in particular the amounts that can be withdrawn, which are specified annually through the Income Tax Act’s stipulations for RRIFs.

Most provinces in Canada require that life income fund assets be invested in a life annuity. In many provinces, LIF withdrawals can begin at any age as long as the income is used for retirement income.

Once an investor begins taking LIF payouts they must monitor the maximum LIF withdrawal amount. The federal LIF maximum amounts are disclosed in the annual Income Tax Act, which provides stipulations pertaining to all RRIFs. The maximum RRIF/LIF withdrawal is the larger of two formulas, both defined as a percentage of the total investments.

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The financial institution from which the LIF is issued must provide an annual statement to the LIF owner. Based on the annual statement and the LIF maximum withdrawal amount, the LIF owner must specify at the beginning of each fiscal year the amount of income they would like to withdraw. This must be within a defined range to ensure the account holds enough funds to provide lifetime income for the LIF owner.

LIF Maximum Payment Amount Table

Below is the LIF maximum payment amount table showing the minimum and maximum withdrawal percentages for LIF and RLIF accounts in 2021 by province. Depending on your age or your spouse’s age (whichever you select), you must withdraw an amount between the minimum and maximum amounts as outlined by the percentages below.

An example calculation is included below; however, if you still need assistance with determining your withdrawal options, we recommend that you contact an investment professional.

LIF Maximum Payment Amount Table

Notes

  • Quebec, Alberta, Manitoba, New Brunswick, and British Columbia pension legislation permits LIF clients who begin a LIF in the middle of a calendar year with funds transferred from a LIRA or pension plan to take the FULL maximum payment for the year. First year payments under the other jurisdictions must be prorated based on the number of months the LIF was in force.
  • ON, BC, AB, NL maximum calculations are based on the greater of a) the result using the factor and b) the previous year’s investment returns. MB LIF maximum calculation is based on the greater of a) the result using the factor and b) the previous year’s investment returns + 6% of the value of all transfers in from a LIRA or Pension Plan during the current year.
  • Saskatchewan Prescribed RRIF – there is no maximum annual withdrawal and you can withdraw all the funds in one lump sum.

How Can I Use My LIF to Invest in Real Estate

How Can I Use My LIF to Invest in Real Estate?

LIF owners can choose their own investments (as long as the investments qualify). Qualified investments in a LIF include cash, mutual funds, ETFs, securities listed on a designated exchange, corporate bonds, and government bonds.

Unlike some other alternative investments, private real estate investments such as mortgage investment corporations and real estate investment trusts can be incorporated into your RRIFs including LIF, allowing you to grow your portfolio while enjoying tax-deferred status.

Like other registered products, contributions grow tax-deferred within a LIF. Funds within a LIF are creditor-protected and can’t be seized to pay off debt obligations. Contributions can grow tax-deferred until the year after you turn 71.

Want to Learn More About Investing with Mortgages? Check out these Blogs.

The New Mortgage Syndication Rules For Non Qualified Syndicated Mortgages

Mortgage Syndication – What’s Going On?

Of course, there are also disadvantages to setting up a LIF. For example, a minimum age requirement applies to both starting a LIF and receiving LIF payments. Furthermore, the maximum withdrawal limits prevent you from accessing more income when you need it. If you’re new to real estate investing, adding such a large asset to your portfolio may seem intimidating.

But it’s easier and more attainable than you might think. I invite you to check out our marketplace and education centre, which has articles, webinars, tools, and more informative videos for investors of every experience level.

See what it takes to invest with Fundscraper, and how easy it can be!

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Life Income Fund FAQs

At What Age Can You Withdraw Money From a LIF?

You can withdraw money at 55 years old. No withdrawals from a LIF are permitted before age 55.

Is LIF Income Taxable?

Yes. LIF income is taxable and must be added to your annual income. If the withdrawal is higher than the annual minimum withdrawal, taxes are withheld on the excess amount.

What Happens to a LIF When You Die?

Upon death, the balance of your LIF is paid to your spouse. If your spouse denies payment or if a spouse is absent, it is paid to your heirs.

3 Key Takeaways of this Article

  1. A LIF or life income fund is a type of registered retirement income fund (RRIF) offered in Canada that can be used to hold locked-in pension funds as well as other assets for an eventual payout as retirement income.
  2. Owners must use the fund in a manner that supports retirement income for their lifetime. Each year’s Income Tax Act specifies the RRIF withdrawal amounts, including the LIF minimum and maximum withdrawal amounts.
  3. The Canadian government regulates various aspects of life income funds, in particular the amounts that can be withdrawn, which are specified annually through the Income Tax Act’s stipulations for RRIFs.

Fundscraper Capital Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

What is an RSP?

It’s never too early to start saving for retirement. Investing in private real estate is an excellent way to diversify your portfolio and start thinking about your financial future. To help you understand all of the options in front of you, we put together a guide to the types of retirement savings plans (RSPs) you should know about.

Key Points

  • RSPs are registered through Canada Revenue Agency (CRA) and are designed to encourage us to save for retirement. 
  • Contributions are tax-deductible based on your marginal tax rate when you put the money in.
  • If you’re interested in investing your RSPs in private mortgages or opening an RRSP, the first thing you should do is seek expert advice. The process isn’t difficult, but if you’ve never done it before, you’ll need an expert to walk you through it.
  • Investing in private real estate is an excellent way to diversify your portfolio. Savvy investors know not to put all of their eggs in one basket, and private real estate helps minimize risk of loss. It also helps generate return and preserve capital.

Regardless of the time of year, it’s important that you have a solid understanding of the basics of registered Retirement Savings Plans (RSP). RSPs are registered through Canada Revenue Agency (CRA) and are designed to encourage us to save for retirement. But don’t wait until retirement is on the horizon to start saving for it! Read on to learn more about your options with RSPs.

What is an RSP?

What does RSP stand for? What is a RSP? An RSP, meaning Retirement Savings Plan, encourages saving for retirement. They can contain investments such as stocks, bonds, mutual funds, ETFs, GICs, and savings accounts.

Contributions are tax-deductible based on your marginal tax rate when you put the money in. If you make $100,000 a year, your marginal tax rate is 43.41%. If you put $1,000 in an RSP, you’ll get about $430 “back.” Your RSP deduction limit for 2021 is 18% of earned income reported on your tax return in the previous year, up to a maximum of $27,830.

You defer paying tax on the money and interest gained until you withdraw it. At that time, it’s considered taxable income, and you pay taxes on it according to your marginal tax rate at that time.  Generally, your income during retirement is lower than the income you earn during your active working years, so withdrawing your funds from your RSP account later will allow you to pay taxes at a lower marginal tax rate.

what is an rsp

How do I Get an RSP?

There are many different types of RSPs that come with tax benefits! Here are the three most common:

Registered Retirement Savings Plan (RRSP)
Often, when a financial institution refers to an RSP, they mean RRSP. The RSP definition can get confused with the RRSP definition. An RRSP can only be sold by financial institutions approved by the Canada Revenue Agency (CRA). You can hold many types of assets within an RRSP, including savings accounts, GICs, stocks, bonds, mutual funds, ETFs, and real estate. RRSP contributions are accepted until December 31 of the year one turns 71. You’re penalized with heavy withholding taxes if you withdraw the funds before you retire.

Tax-Free Savings Account (TFSA)
TFSAs can hold any type of RSP-eligible investment, including stocks, bonds, mutual funds, real estate, ETFs, or cash deposits. Any Canadian who is over the age of 18 and has filed a tax return can open a TFSA. Unlike RSPs, contributions are not tax-deductible. When you withdraw money from your TFSA, you don’t have to pay income tax on it.

Registered Pension Plans
Many employers set up pension plans for their employees. There are two types: Defined Benefit (DB) and Defined Contribution (DC). DB plans promise to pay a set pension amount based on a formula including age, years of service, and earnings history; DC plans provide pension benefits based solely on the contributions and investment earnings.

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What’s the Difference Between an RSP and an RRSP?

In conversation, people often use “RSP” when referring to an RRSP because it’s shorter and easier to say. And it’s not inaccurate: an RRSP is a type of RSP, which is an umbrella term that refers to any Retirement Savings Plan. An RRSP is a specific type of account with two stand out characteristics. The first — it has tax advantages in that any contributions can be deducted from your income. The second — there are yearly RRSP contribution limits. While an RSP can refer to a number of retirement accounts, an RRSP refers to one type of account specifically. Sometimes people will refer to an RRSP as an RSP (because it is) but so too are many other retirement accounts.

rsp definition

What are the Benefits of Using an RSP to Invest in Real Estate?

Investing in private real estate is an excellent way to diversify your portfolio. Savvy investors know not to put all of their eggs in one basket, and private real estate helps minimize risk of loss. It also helps generate return and preserve capital.

Most people think mortgages or mortgage backed investments are a financial instrument reserved only for banks and hedge funds. A mortgage does not have to be hundreds of thousands of dollars. Individuals such as yourself can execute mortgages against properties or participate in mortgage backed offerings as investments, and you’re able to earn returns through RSPs described above.

Investment advisors commonly recommend that a person’s portfolio have between 10% and 20% in real estate. It is generally thought that investors who are risk-averse tend to limit their investments to stocks and bonds, while investors who are less risk-averse hold a mix with more alternative investments like real estate. What is evolving today is that investors who want more diversification should actually be weighing more of their portfolio towards alternative assets like real estate than otherwise. This is because real estate is a strong non-correlated asset class, which many risk-averse investors are attracted.

How do I Invest in Real Estate Using an RSP?

If you’re interested in investing your RSPs in private mortgages or opening an RRSP, the first thing you should do is seek expert advice. The process isn’t difficult, but if you’ve never done it before, you’ll need an expert to walk you through it. That’s what we’re here for!

Your advisor should be a registered mortgage broker, dealing representative, financial advisor, accountant or an exempt market dealer focused on real estate and mortgages. At Fundscraper, we’re both a mortgage broker and exempt market dealer. We begin by asking about your investing experience, investment portfolio to date, risk appetite, expectations, current needs, and future needs. This is called a suitability assessment, and it helps us determine whether private real estate is an appropriate investment for you at this juncture of your life. If yes, the next step is identifying a mortgage backed investment product that would be suitable for you.

Once we have found something that is suitable for you, the next steps are setting up how you can acquire the private mortgage backed investment security with your current RRSP funds that are held by your bank or financial advisor. Those RRSP funds are likely tied up in mutual funds, exchange traded funds, and other RRSP eligible securities. We’ll help you with this process as much or as little as you need.

Fundscraper Capital Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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