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.

Start Investing in Real Estate Today

Explore the investments available on Fundscraper.

An Inside Look: How Financing a Real Estate Project Works

Real estate investors often wonder why a developer might choose to pay what seems to be an unusually high rate of mortgage interest when compared to prevailing rates. Well, the truth is that sometimes it’s in their long term interest to do so and raise equity capital instead. This article explains the whys and why not’s from an insider’s perspective.

Key Points

  • There are three ways to fund a real estate project: debt, equity, or a combination.
  • The amount of money required for a project from different sources is called the “cost of capital” and is vital to determining a developer’s “optimal capital structure.” It all hinges on the concept of ROE (Return on Equity) which very much takes into account leverage.
  • The choice of debt, equity, or combination financing is exceedingly complex and will depend on the circumstances and metrics of each project. At the very least, you may now have a better understanding of why sometimes a real estate developer will take on a high-interest first or second mortgage, bearing say 10% or 12% where going rates for standard mortgages or lines of credit are a lot less.

How does a developer fund a real estate project?

A developer needs capital to fund land acquisition, construction, and all soft and hard costs associated with a real estate project. In the absence of an unlimited bank account, they have three options: debt financing, equity financing, or a combination.

Debt financing is accomplished through borrowing. Usually, this: (i) means a higher ratio of investment via debt capital as opposed to equity capital; (ii) allows for tax-deductible interest (i.e., the interest paid on debt is a business expense and is deductible); and (iii) maximizes leverage.

Leverage is using borrowed money (debt) to amplify or increase potential returns from a project. It allows a developer to multiply buying power in the marketplace. So, for example, if the project costs $100, the developer could get 10 investors to chip in $10 each.  They each own one tenth of the project.  When finished, let’s presume the project will be worth 133.00.  Now, each investor’s share is worth 13.30! Well the developer knows banks are in the business of lending money so the developer (and his investors!) know the bank will come in for $60 of the cost of the project! Whoo – woo! The investors only have to put in $40! So, for $40 the equity investors have $100 of brick and mortar.  But once the building is finished those $40 investors will have building worth $133.00! That’s not bad.  If we were to increase the amount of indebtedness by another $20, the investors would only have to put up $20! Now for $20 you get a building worth $133.  That’s how leverage works! The more debt you “lever” into a project, the less equity you need; the smaller the equity requirement, the greater the return on that equity!

Equity financing refers to selling part of the project to investors. Given more risk to an investor, the cost of equity for the developer is generally higher — except in the case where the developer is able to keep equity for itself and benefit from owning more rather than less. The only time a developer has to share ownership of a project is when the developer needs more equity.   

There are three ways to fund a real estate project: debt, equity, or a combination.

Choosing between debt financing and equity financing

The “cost of capital” is the amount of money required to complete a project and is vital to determining a developer’s “optimal capital structure.” It all hinges on the concept of ROE (Return on Equity) which very much takes into account leverage. The actual calculation of ROE is “net income” of the business (i.e., income after expenses (including debt repayment!) and taxes) divided by the shareholder equity. As debt is subtracted from the calculation, the ROE increases. In fact, if the ROE appears too high, it may be a warning sign that there is too much debt in the enterprise.  Generally, an ROE equal or less than 10% would be considered poor. 

Typically, equity financing returns deliver a higher IRR (Internal Rate of Return) over the life of the project than debt financing which is reasonable when you think about. Debt financing is generally secured.  If something goes wrong, the secured lender can step in, seize the assets and repay themselves.  Equity is full “at risk”; it’s not secured. If something goes wrong, the equity investor is out of luck! They potentially lose everything.  Therefore an equity investor will demand more in return than a debt investor. In real estate it is not unusual at all that an equity investor will look for a return of 20% or  more on its investment.  And because they are an owner, they expect that forever!  If the need for additional equity could be satisfied with high interest rate debt, then that becomes a credible alternative for the developer.  If high rate debt is 14%, but the developer anticipates being able to pay it all back in 3 years, debt makes a lot of sense.  A developer with an eye on maximizing ultimate profit will be understandably jealous of keeping as much equity as feasible and therefore may prefer to pay a risk premium for mortgage financing.

There’s also “bridge financing” (which really has nothing to do with bridges), which is a type of mortgage financing that is a premium when compared to the risk free rate of return, but a discount if you compare it to the cost of equity. It’s often used by developers to temporarily finance the cash flow for a short period of time (ergo, the “bridge”). Instead of injecting additional equity, they will need to fund the financing gap and bridge the project until it reaches the next stage of development or a subsequent financing stage. Generally, bridge loans are short term (12-36 months), pay interest only so it is non-amortizing, and have a well-defined exit strategy.

Here’s what a typical project lifestyle looks like and what kind of financing is utilized during different project development stages.

A developer may also choose a combination of debt financing and equity financing, coming up with an “optimal capital structure” that balances both and keeps in mind the cash requirements of the project at its various stages.

What are cost of debt and cost of equity?

If you need financial capital to construct an asset and then sell the asset, the interest expense for borrowing the capital is the cost of debt. Equity also has a cost, in the form of profit-sharing, and this is the cost of equity or the expected rate of return a fellow owner would expect for a similar risk profile investment. The weighted average of a project’s cost of debt and cost of equity is generally the cost of capital. The lower your overall average cost of capital, the more profit you can keep for yourself as the owner.

Consider a small project where the developer is planning to do a build and flip, with the below Pro-forma budget. This model below assumes a duration of 12-18 months:In the No Leverage scenario, the developer maximizes the cash profit. However, they have to inject 2.146M of their own equity. For every dollar the developer invests, i.e. their equity injection, they will earn a 19% return or 19 cents for every dollar of equity. When a party invests for an ownership interest, then they have an equitable interest, or equity, and have a beneficial interest in the profits from the project. Put another way, an equity investor will likely expect or require a 19% return on their invested equity capital (the “expected return” or equity’s “cost of capital”).

Whereas if someone were to invest and own the debt or mortgage of a property, then they become a debtholder entitled to a return defined by a predetermined interest rate. As a debtholder, you will get paid first, but that’s why your return is fixed. As an equity holder, you may get paid last, but you keep the rest of the upside.

What is leverage?

As stated above, leverage is using borrowed money (debt) to amplify or increase potential returns from a project. In some scenarios, for every dollar a developer invests, they can earn more per dollar by investing less equity. Consider this example:

By taking on additional debt and actually reducing the nominal dollar profitability, the developer achieves a few strategic objectives. It frees up over $550K of the developer’s capital, which they can deploy to another site, thereby diversifying their portfolio and helping them line up additional sites (a pipeline) for future work. It adds additional liquidity into the project. And financially, it increases the rate of return or ROE for every dollar the developer invests. Instead of earning $0.19 for every dollar invested, the equity owner earns a projected $0.238!

Borrowing from a private lender vs bringing on additional equity partners

We’re going on a math tangent now — stay with us! Even if you don’t speak equations, seeing real-life examples is a helpful way to better understand investing concepts.

The weighted average cost of capital (WACC) is calculated by the formula:

(Proportion of Equity Capital %) * (Cost of Equity) + (Proportion of Debt Capital %) * (Cost of Debt) = [100% * 19% + 0% * 12% ] = 19%

Your debt holders only demand 12%, but equity partners will want their 19% return. From a project point of view, the cost of that capital is going to be 19%! It’s the expected return your equity holders expect to receive by investing in the project. If you took on debt even at 12%, the math would work out to be 13.8%. So, overall, you can pay $0.138, or pay $0.19 for every dollar invested.

Ask yourself: Which project has a lower cost of capital? As the principal owner of the project, you want to drive down your cost of capital as much as possible. That way, you can take on projects of varying profitability and be competitive with how much you can pay for the residual value of the land at the time of acquisition.

The choice of debt financing, equity financing, or combination financing depends on the circumstances and metrics of each project.

How to get started

Funding a real estate project is a complex subject. We hope you now have a better understanding of why sometimes a real estate developer will take on a high-interest first or second mortgage when going rates for standard mortgages or lines of credit are a lot less.

Still have questions? Fundscraper is here to help its community wade through these kinds of considerations which are key to analyzing the underpinnings of its project offerings. We aim to provide our clients with the ability to make informed decisions and deliver a transparent investing process. Contact us today to learn more about your real estate investment options.

Start Investing in Real Estate Today

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How to Evaluate MICs

Historically low-interest rates in recent years have become the driving force for many savvy investors to build wealth through one of Canada’s hottest private real estate investment products: mortgages. This is all possible through Mortgage Investment Corporations (MICs), which are designed to bring like-minded investors together to passively invest in real estate mortgages. Instead of owning “brick and mortar” and playing property manager, you’re a banker! But how well do they work? What considerations should investors note? Here, we show you how to analyze a MIC before investing in one.

Key Points

  • Historically low-interest rates in recent years have become the driving force for many savvy investors to build wealth through one of Canada’s hottest private real estate investment products: mortgages. 
  • There’s more than one way to buy a property or buy a home. MICs are an accessible investment vehicle for many — especially those seeking diversification from traditional investments like mutual funds and the stock market.

The Modern Day Playbook For Super Successful Investing

How can a smart, modern investor get in on the real estate investing action, especially since going on your own may require prohibitive amounts of capital? Most people do not have the requisite knowledge or expertise to invest in real estate on their own.

Here’s Why You Should be Investing in Mortgage Investment Corporations

A MIC is a company that pools shareholder capital, lends that capital out as mortgages, earns income via interest and fees, and pays 100% of its net income (after management fees) back to the shareholders.

Dividends paid by the MIC are taxed as interest. Many MIC investors prefer to hold their shares in a registered account like an RRSP, RESP, RRIF, or TFSA.

An investment in shares of a well-managed MIC provides investors with:

  • Capital preservation
  • Regular dividend income
  • Potential for growth via reinvestment
  • Constant deployment of capital
  • Full-service origination and administration

Still have questions about how to invest in mortgage investment corporations? Schedule a call with us and we’ll walk you through it.

Types of MICs

MICs usually hold the majority of their assets in high-yield, uninsured residential mortgages. Unlike banks, these pools of capital are generally lending for much shorter terms, with 6 to 24 months being standard.

MICs lend money to people who would or have been turned down by more traditional outlets like banks, credit unions or large alternative lenders. As such, they are able to charge significantly higher interest rates on their mortgages (in some cases in excess of 10%). In a hot real estate market such as the GTA and Vancouver, many borrowers have sought money from MICs to purchase homes or bridge gaps in funding.

To understand the allure of MICs, compare them to other fixed income investments. It’s rare to find a GIC that pays even 2% for a one-year term these days. Government bonds offer similarly low yields, even for 10-year terms. Investment-grade corporate debt does pay more, but even with those bonds, 4.0% to 4.5% is pretty much the limit these days in Canada. Bottom line, if you’re slightly more adventuresome, MICs can offer a better return.

There’s more than one way to buy a property or buy a home. MICs are an accessible investment vehicle for many — especially those seeking diversification from traditional investments like mutual funds and the stock market.

Pros and Cons: What You Need To Know

Pros

  1. Investing in a MIC spreads the investment across a large pool of mortgages, mitigating the risk from investing in single specific mortgages.
  2. Fund managers actively manage the investments and mortgages, providing an investor with a hands-free investment experience.
  3. MICs are required to comply with Federal regulations and the provisions of the Canadian Income Tax Act.
  4. A MIC generates its return from monthly mortgage payments made by the borrowers. This provides investors a stream of income while their investment is secured against real property. An investor is relying on debt repayment; not rental income!
  5. Under the Income Tax Act, taxable dividends paid to shareholders are taxed as interest income. A MIC does not pay any income taxes, provided that we distribute all of our taxable income each year.

Cons

  1. The people receiving the mortgage may have low credit. With rates on prime mortgages so low, for someone to be paying on the order of 10% annually indicates that they’re a subprime borrower.
  2. With housing prices so lofty, the underlying collateral behind these private mortgages may not be so sound. Should prices start to fall and a borrower defaults, the MIC may not recoup all of its money when it seizes and sells the asset.
  3. There’s potential for a so-called liquidity mismatch: Most MICs are “private” meaning they do not publicly trade their shares. An investment in a MIC is not “liquid”. Investors who need easy access to cash should avoid investing in private MICs.

How to Analyze Mortgage Investment Corporations

  1. Check track record and team expertise.
    When planning to invest in a MIC, check out the track record and team expertise of those sponsoring/promoting the MIC. Anyone can set up a MIC (and there are hundreds!), but it takes skill to lend carefully and profitably. Get help – a licensed advisor can help you sift through the noise an help you find the folks that can deliver you the investment return you’re targeting.
  2. Make sure the investment is suitable for your risk tolerance and investment goals.
    Risk-averse investors should look for a mortgage pool that is lower in risk. The riskiness of a fund or pool can be judged by the pool’s underwriting criteria – is the pool made up mostly of first mortgages (suggesting it’s relatively conserbative), mostly seconds (oh, might be a tad risky) or is it some balance of the two? Sometimes it’s easy to find this information. A reputable issuer will have good disclosure documents like an offering memorandum (What’s an offering memorandum?) that will provide lots of detail. Again, a licensed advisor will help you find this information. If income and preservation of capital are your goals, you’ll likely lean toward a pool that has conservative underwriting criteria and consistently delivers modest but good returns and supports your personal finance. Learn more about our underwriting criteria here. Advisors like Fundscraper will help you find something suitable.
  3. Understand the mortgage portfolio composition and concentration.
    • Types of Mortgages
      There are a variety of types of mortgages – first, second, third and so on. A mortgage (also called a “charge”) is simply a registered notice to the world that in the event the owner of the property fails to pay back a debt owed, then the person that has the benefit of the mortgage/charge may force a sale of the property to satisfy the debt owed. Mortgages are ranked according to time of registration – first on title gets the first “kick at the can”! Only after the first is satisfied, can the next party step up! So, as you can imagine, the further down the line a lender might be,, the higher the risk is that the lender will not be able to be repaid by forcing a sale of assets as there simply may be no assets left to sell when that lender’s turn comes up! And that is how mortgages are generally priced: the higher likelihood of repayment the lower the rate of interest; the lower likelihood of payment, the higher the rate of interest!

      An asset manager like Fundscraper will create a mortgage pool to reflect risk of repayment. Our first mortgage pool only invests in first mortgages, which means Fundscraper has a greater likelihood of being made whole on its investments in the event a borrower fails to repay its debt owed.

    • Terms of Mortgages 
      The term of a mortgage is the length of time a borrower may use the funds advanced by a lender. A term may be any period of time. The private mortgage world a mortgage loan will typically be anywhere from six months to three years. The reason for the shorter term is that these mortgages are risky than traditional mortgages and lenders like to review terms more often then in a traditional setting. These shorter term mortgages will often renew. Mortgage pools that are populated with these shorter term mortgages benefit by the frequent renewals as changes in rates can be made and fees earned in the renewal process. For example, in Fundscraper’s Diversified First Mortgage Pool the terms of the first mortgages contained in that pool vary between 6-18 months.
    • Geographical Location 
      You should be wary of mortgage pools that have a high concentration of mortgages in one geographical location, because it is more sensitive to adverse local economic and real estate conditions. Our Diversified First Mortgage Pool is selective about real estate development, investing in single-family and multi-family residential assets in established neighbourhoods in southern Ontario.
  4. Know the loan-to-value of the mortgage portfolio.
    For most mortgage pool funds, a loan-to-value ratio of 75% is considered conservative (banks typically lend at a max. loan-to-value ratio of 75%). This means that the amount of the loan cannot exceed 70% of the property’s value. The difference between the loan and property value creates a safety cushion that protects investors from losses in the event of a borrower default that triggers a foreclosure and sale. Get a crash course on loan-to-value here.
  5. Understand all fees.
    Investors in mortgage pools sometimes pay higher fees that can reduce the payout amounts to you. Fees can be high and can include management fees, performance fees, and mortgage origination fees. The operating expenses of the mortgage pool are also funded from investor money. This means that a manager can earn a higher return than investors through the different types of fees. Our First Mortgage Pool has a 1% management or mortgage servicing fee and the fee details are disclosed in our offering memorandum.
  6. Check for compliance.
    Fundscraper Property Trust must comply with the rules of government agencies, which are described in its disclosure documents. The principal document is the offering memorandum, which contains information regarding the Trust’s structure and objectives and management team experience. Fundscraper Capital Inc., the promoter of the Trust, is strictly regulated as an Exempt Market Dealer.

Still not sure how to analyze mortgage investment corporations in Canada? Whether you want to buy a single-family home or rental property, invest in office buildings, are considering buying an investment property, or have questions about real estate investment trusts (REITs), our team can help you understand your options. Schedule a call with us and we’ll answer all of your questions.

Start Investing in Real Estate Today

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How to Invest TFSA

Private real estate investment is too often overlooked in an investment world dominated by hedge funds, ETFs, Principal Protected Products, publicly traded shares, and bonds. If you think private real estate investing is only for the wealthy or experienced, think again. Many people don’t realize they can invest their tax free savings account (TFSA) dollars in private real estate. 

Key Points

  • Many people don’t realize they can invest their TFSA in private real estate. We put together a guide to walk you through the process and show you how to invest with a TFSA.
  • Private real estate investing is for everyone, especially because you can use your TFSA to invest and you don’t pay taxes on your profit!
  • Investing your TFSA in private mortgages is easy! Nevertheless, it’s important to have your advisor orchestrate the process on your behalf, as there are moving pieces that have to be coordinated.

What Is Investing with a TFSA?

Private real estate investing is for everyone, especially because you can use your TFSA to invest and you don’t pay taxes on your profit! In fact, TFSA investing is an affordable, approachable way to get started. Not sure how to invest with TFSA or what that means? We’ll explain.

How to Invest with TFSA

Real Estate Investment Trusts (REITs): Investing with a TFSA

The majority of Canadians hold their retirement savings in registered accounts at major financial institutions. When folks open a TFSA they normally invest in stocks, bonds, mutual funds, exchange traded funds, and other public securities that trade on public stock exchanges. Many people believe that is all they can invest in through their TFSAs. But stocks, exchange traded funds, and the like only scratch the surface of what’s possible.

Most people don’t realize they can invest in private mortgage investment entities like mortgage investment corporations (MICs) and mortgage trusts, as well as mortgages directly, with their TFSAs. If you’re interested in doing this, we can help.

Not everyone knows how to invest TFSA funds. Interested in investing through TFSA? Fundscraper can help.

Investing with a TFSA in Mortgages

If you’re interested in investing with TFSA in private mortgages, whether directly or through a mortgage investment entity like a MIC or mortgage trust, the first thing you should do is seek expert advice if you have little experience in the private mortgage markets. The process of direct investing TFSA is not difficult, but if you’ve never done it before, you’ll need an expert to walk you through your due diligence. That’s what we’re here for!

Do you qualify? Find out your investor eligibility here.

Your advisor should be a registered mortgage broker or an exempt market dealer focused on mortgages. At Fundscraper, we’re both. 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 investment product that would be suitable for you.

Investing Through a TFSA in Commercial Properties

Your tax-free savings account is very flexible. First, determine your TFSA contribution limit. This is very important and easy to do. It’s important because you cannot invest more than the limit CRA imposes on your TFSA account. It is easy to find out what your maximum contribution limit is by going to your “MYCRA” account. You’ll find out there how much available room you have to invest in a TFSA in any calendar year. Unused amounts from previous years are carried over!

Once you know how much you can invest, you’ll need to know what investments qualify for your TFSA account. CRA provides a handy schedule of qualified investments for all registered accounts, including TFSAs, here: Qualified Investments for Registered Accounts. In this schedule, you’ll find that in addition to stocks and bonds, there are other types of investments such as mutual fund trusts and corporations, and special investment vehicles like MICs. If you want to hold a mortgage in your TFSA, you’ll see that certain “debt obligations” also qualify for your TFSA. You cannot hold property directly in your TFSA.

After you make contributions to a TFSA, the investment income that accumulates may be withdrawn by you tax free.

How to Invest with a TFSA Through a Private Limited Partnership

There are two ways to make an investment through your TFSA account.

If this is your first time, you will do the following:

  1. Visit a bank, trust company, or credit union and ask to open a “self directed” TFSA account.
  2. Once the account is open, deposit the amount of money you wish to invest into the account.
  3. Next, you have to instruct the account what to buy. To do this, the financial institution will provide you with a “payment direction” that tells the financial institution, on behalf of the TFSA account held by the financial institution, what security to buy.
  4. The financial institution will then purchase the security on behalf of the account pursuant to your instruction.

You may already have a TFSA account at a big bank. If you do, that account is likely capitalized with big bank sponsored products like big bank mutual funds and ETF. Once we have found something that is suitable for you, and you know precisely how much you need to make your investment, you will need to contact your big bank account manager. If you want to use what’s there to fund your private mortgage or investment fund investment, you have to take the following few steps. We’ll help you with this process as much or as little as you need:

  1. Fund your investment. Instruct a big bank account manager to liquidate a fraction of your TFSA holdings to the cash amount you need to make your new investment.
  2. Open a self-directed TFSA. Ask your financial institution (any Canadian chartered bank or trust company) to do this. If you are purchasing a private investment fund or shares of a mortgage investment company, those issuers will have registered account “service providers” who will help you open your new TFSA self-directed investing account.
  3. Transfer your liquidated funds to your new account. You’ll complete a “transfer instruction” whereby your new financial institution will request that your current big bank TFSA institution to transfer the liquidated funds to your new self-directed TFSA account.
  4. Wait for the funds to transfer. The transfer can take up to four weeks. In order to maintain TFSA eligibility, funds must move directly from one TFSA account to another. You cannot withdraw the funds yourself, take them to your financial institution, and deposit them. DO NOT WITHDRAW YOUR MONEY. TRANSFER ONLY.
  5. Invest your TFSA into private real estate. Once the funds arrive in your self-directed TFSA account, as above, you will issue a payment instruction to tell the self-directed TFSA account to fund your investment in the private mortgage investment entity. The financial institution has a standard form of payment direction that it will provide to you.
    The investment income that accumulates in your TFSA may be withdrawn by you tax free!

Investing your TFSA in private mortgages is easy! Nevertheless, it’s important to have your advisor orchestrate the process on your behalf, as there are moving pieces

Summing Up How to Invest with a TFSA

Your registered investment account savings are your nest egg. Be careful with how you employ and invest these funds. Not everyone knows how to invest TFSA funds. Work closely with reputable dealers to first determine whether investing in private mortgage securities is suitable for you and, if so, what the best private mortgage investment products are for you at the time you want to make the investment.

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