Private real estate investment is too often overlooked in an investment world dominated by hedge funds, ETFs, Principal Protected Products, publicly traded shares, bonds, and the mind numbing array of derivative products that too often seem to cloak hazard rather than leverage return. What happened to simple investment?
There are three reasons to invest in private real estate today: diversify, diversify, diversify. The core benefits to diversification are:
- minimizing risk of loss (i.e., not putting all your eggs in one basket!);
- preserving capital, finding the right mix of hopeful high flyers and the dull and reliable; and
- generating return – think of the combustion engine: not every cylinder fires at once – so too it is with your portfolio.
Investment advisors will 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 would tend to hold a mix with more real estate and less risk-averse investors would tend to weigh stocks more heavily in their portfolio. What is evolving today is that the less risk-averse investor should actually be the one weighing their portfolio more favourably toward real estate than otherwise. This is because real estate is such a strong non-correlated asset class to the hoped for “high flyers” to which so many less risk-averse investors are attracted.
The majority of Canadians hold their retirement savings in registered accounts, what we commonly referred to as our RRSPs (“registered retirement savings plans”). A “registered” plan simply means the plan, and the account associated with it, is registered (or held) by a service provided recognized by the Canada Revenue Authority to manage accounts that benefit from the special treatment our federal and provincial government’s grant to these unique retirement savings plans.
Most often people invest their RRSPs in stocks, bonds, mutual funds, exchange traded funds and other public security. Many people believe that is all they can invest in through their RRSPs. In fact, there is a fairly long list of what people can invest in through their RRSPs. Most people don’t realize that they can invest in private mortgage investment entities like mortgage investment corporations and mortgage trusts as well as mortgages directly. We are often asked how to do this.
The process is not difficult, but if you have never done this before, you will need hand-holding. If you are interested in investing your RRSPs in private mortgages, whether directly or through a mortgage investment entity like a MIC or mortgage trust, then the first thing you should do is seek expert advice if you have little experience in the private mortgage markets. There is a vast array of product offerings – mortgage security comes in all forms and sizes! A registered mortgage broker or an exempt market dealer focused on mortgages should be your first choice for an advisor.
At Fundscraper (we are both a mortgage broker and an exempt market dealer), we begin by asking you lots of questions about what experience you have with investing generally, how much you have, what your portfolio is made up of, what kind of risk you are comfortable with, what your expectations are and what currently and in the near future are your needs. The point of this examination is first and foremost to assess with you whether private real estate is an appropriate investment for you at this juncture of your life. It’s called a “suitability” assessment and it doesn’t mean it may result in your being forbidden from investing in private real estate, but whether or not it is appropriate.
If, after discussion, it is thought to be suitable to press ahead, we begin by identifying a mortgage investment product that would be suitable for you given what you have told us above. As you will note, Fundscraper has a duty not only to know you, but it is the products it offers you! Once we have found something that is suitable for you, the next steps are setting up how you can acquire the private mortgage 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. To fund your investment into a private mortgage investment entity, you will have to liquidate (i.e., cash out) a fraction of your holdings to the cash amount you require to make your new investment.
Next, you will attend your financial institution (any Canadian chartered bank or trust company) to open up a “self directed RRSP”. Once the account is established, you have to fill up your newly created self-directed RRSP account! You will do that with the kind assistance of the financial institution which has helped you set up the account. You will complete a “transfer instruction” whereby your new financial institution will request the other institution who currently holds your RRSP accounts (that now hold cash portion you wish to use to invest) to transfer the cash portion that is in that account to your newly created self-directed RRSP account! To help complete the transfer instruction you will provide up-to-date account statements to the new financial institution as it will need to know the name of the institution and the account number of the existing RRSP account in order to properly effect the transfer. Once all the forms are completed, they are filed with originating institution instructing it to transfer your cash portion to your newly created self-directed RRSP account with the new financial institution. The transfer can take up to four weeks. In order to maintain RRSP eligibility, funds must move directly from one RRSP account to another – regrettably, you cannot simply withdraw the funds and walk them across the street and deposit them.
Time passes and the funds finally arrive in your self-directed RRSP account. Now you have to tell the self-directed RRSP account to fund your investment in the private mortgage investment entity! You do that by way of delivering to the financial institution a “payment direction” – the financial institution has a standard form of payment direction that it will provide to you. The payment direction tells the financial institution to invest in the private mortgage investment entity for you through the newly created self-directed RRSP account for the amount set out in the direction. It’s all quite easy!
Nevertheless, it is important to have your advisor orchestrate the process on your behalf as there are several bits and pieces that have to be coordinated.
Your registered account savings are your nest egg – be very careful how you employ and invest these funds. Work closely with reputable dealers to first determine whether investing in private mortgage securities is suitable for you and, if so, what are the best private mortgage investment products for you at the time you want to make the investment.
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