How Do I Invest My RRSPs into Private Real Estate?

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. Private real estate investing is for everyone, especially because you can use your RRSPs to invest. It’s an affordable, approachable way to get started. Not sure how to do that or what that means? We’ll explain.

Key Points

  • 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, with their RRSPs.
  • 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.

What is an RRSP?

RRSP stands for “registered retirement savings plan.” A “registered” plan means the plan, and the account associated with it, is registered (or held) by a service provided 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. Other examples of “registered” plans are “Registered Retirement Income Funds” and “Tax Free Savings Accounts”. What is discussed below is applicable to RRIFs and TFSAs as well!

The majority of Canadians hold their retirement savings in registered accounts. Most often people invest their RRSPs in stocks, bonds, mutual funds, exchange traded funds and other public securities. Many people believe that is all they can invest in through their RRSPs, but that only scratches the surface of what’s possible.

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, with their RRSPs. If you’re interested in doing this, we can help.

What are the benefits? Considerations?

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.

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 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.

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 through their registered accounts.

How to determine which real estate investments are right for you

If you’re 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. The process is not 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 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.

How to Invest in Real Estate, How to Invest in Reals Estate Canada, How to Invest in Commercial Real Estate

How to invest RRSPs into private real estate

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. We’ll help you with this process as much or as little as you need.

  1. Fund your investment. Liquidate a fraction of your RRSP holdings to the cash amount you need to make your new investment.
  2. Open a self-directed RRSP. Ask your financial institution (any Canadian chartered bank or trust company) to do this.
  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 RRSP institution transfers the liquidated funds to your new self-directed RRSP account. Once all the forms are completed, they are filed with the originating institution instructing it to transfer your cash portion to your newly created self-directed RRSP account with the new financial institution.
  4. Wait for the funds to transfer. The transfer can take up to four weeks. In order to maintain RRSP eligibility, funds must move directly from one RRSP account to another. You cannot withdraw the funds yourself, take them to your financial institution, and deposit them.
  5. Invest your RRSPs into private real estate. Once the funds arrive in your self-directed RRSP account, 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.

Investing your RRSPs 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.

How do I get started?

Your registered account savings are your nest egg. Be careful with 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 the best private mortgage investment products are for you at the time you want to make the investment.

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How to Invest in Real Estate

The wealthiest investors all have one thing in common: They invest in real estate. You can do it, too, even if you can’t afford a down payment. Read our latest article to learn how to invest like the 1%.

Think you can’t afford a real estate investment? Think again. Worried now isn’t the right time to add another property to your portfolio? It is possible, and we’ve got you.

Even if the extent of your financial experience is a high-yield savings account, you can—and should!—diversify your portfolio with real estate. Fundscraper will teach you how to invest in real estate like the 1% does. If you’re wondering how to invest in real estate, Canada is an excellent real estate market for both seasoned investors and newbies alike.

How to Invest in Real Estate

Here’s Why You Should be Investing in Real Estate

Most of us never get a chance to participate directly in a major real estate project — usually grabbed up by big players, like private equity firms, banks, insurance companies, pension funds, and government institutions.

We are mostly left to public mutual funds, real estate investment trusts (REITs), exchange traded funds (ETFs), and the like. Most people don’t think they have the means or personal finance to buy an investment property, a rental property, an office building, or a single-family home as an investment, but they very well might.

The bottom line isn’t necessarily where you think it is.

Every investor’s goal should be to build a more perfect portfolio designed for maximum rewards and minimum risk.

Consider the experience of and the lessons to be learned from the Yale University Endowment, which is one of the best performing investment portfolios in North America, having a current value in the range of $30 billion. The fund is known for its “20% rule” which recommends at least 20% be invested directly in private markets, such as real estate.

This invariably translates into significantly higher returns over time for real estate investors over those who employ a more traditional allocation based in public markets. One can only conclude that it makes sense to piggyback onto a tried and true paradigm of real estate investing established by the major players.

If you’re new to real estate investing, the idea of adding such a large asset to your portfolio may seem intimidating. But it’s easier and more attainable than you might think.

Is Investing in Real Estate a Good Decision?

Too often, the traditional portfolio mix fails to achieve optimum performance because of the under-representation of direct real estate investing. Our thesis is simple: You’ll likely be more successful if you put more emphasis on solid direct real estate investing, while at the same time maintaining a high degree of safety.

Being risk averse is a good thing. We’re risk averse, too! Most people are naturally risk averse. We’re drawn to what we know and hesitant of what we don’t know.

The average person knows more about traditional investments like stocks and bonds, so that’s where they put most of their money. But the investment environment, especially in the stock market and bond market, can be volatile.

If you’re risk-averse, you should know that limiting your investments to only the public markets is one of the biggest investing risks of all.

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.

Why Investing in Real Estate isn’t just for the Wealthy Anymore

An investment property probably conjures images of the wealthy 1%, but we help make that dream accessible to many. Investing limited only to public markets risks the chance of devastation if the “bubble” precipitously bursts based on factors beyond our control, such as environmental disasters, inflation, or fluctuating interest rates.

How to Invest in Real Estate

Common sense tells us to spread our money out into a diversity of pots, hoping the ups and downs will balance out and we will enjoy a somewhat stable, if unspectacular, return on our investments. As such, to grow and build wealth, it’s a good idea to put a bigger emphasis on real estate investing.

You can add real estate to your portfolio without actually needing to buy a home, or even buy a property.

How to Invest in Real Estate Like a Pro: What You Need to Know

Direct real estate investing fluctuates quite distinctly from other conventional asset groups like stocks and bonds. For instance, real estate is tangible and is what lawyers call an “immovable.” It’s not a substitute that should take the place of other assets in your portfolio, but rather an asset group all its own.

Unlike stocks and bonds, real estate trades privately based on local factors such as location, supply, demand, and investment lifespan. It is often scarce, particularly in growing areas, which translates to a history of appreciating value. In your portfolio, real estate investing is a channel to investments backed by real hard assets providing a regular income stream and long term growth coupled with the benefits of diversification.

You can enjoy superior performance and diversity at the same time. This is especially true if you’re maintaining and growing the value of your retirement portfolio. Smart real estate investing can only enhance the prospect of enjoying the benefits of things like reasonable leverage (typically as much as 4 or 5 times) and the miracle of compound interest over an extended period of time.

Your investment portfolio can enjoy superior performance and diversity at the same time. You don’t even need to be a landlord or property manager!

Meaningful real estate investing is essential for a well-rounded and successful investment package, and the benefits go well beyond diversification. The most obvious benefit of real estate investment is the financial one.

Real estate earns attractive monthly returns and can provide a regular fixed income stream over a set time frame. Speaking of tangibility, that’s another benefit: Real estate is a hard permanent asset that can be easily securitized. It has value, and you can calculate that value at any given moment.

Take advantage of having solid real estate investing as a meaningful part of your portfolio. It’s a self-evident way to enjoy reasonable returns and balance out the vagaries and unpredictable fluctuations in public securities markets, both domestic and international. It’ll pay off in the long term while maintaining a high degree of safety.

Other benefits of real estate investment to note include:

  • The ability to take advantage of leverage
  • Tax deductions
  • A chance to create added value
  • An increased voice in the management of the asset

Now that you know more about how to invest in real estate in Ontario, Fundscraper is here to answer any further questions you have about how to invest in commercial real estate, real estate development, and more. It’s time you start earning passive rental income. Contact us today to get started.

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Guide to Buying Investment Property Mortgages

Key Points

  • You can expect the interest rate on your mortgage for investment property, Canada specifically, to be at least 0.50% to 0.75% higher than the rate on your primary mortgage.
  • If you don’t want to manage real estate, or don’t have the money for the down payment and financing to buy the real estate, consider an alternative to a conventional mortgage.

Buying rental property can be a great way to invest for the long term and generate monthly income. Like any investment, research the pros and cons before making any decisions and be clear on your goals and risk appetite for owning rental property.

Investment Property Mortgages: What You Need to Know

Advantages

Disadvantages

You pay fewer taxes.

You can deduct certain expenses from your income, including mortgage interest, property taxes, insurance, maintenance, upgrades, property management, and more.

You take on the responsibilities and challenges of a landlord.

Rental units need repairs and dealing with tenants can be challenging.

You may be able to deduct losses for tax purposes.

If your expenses exceed your rental income, you may be able to deduct that loss from any other sources of income.

It may be difficult and costly to sell the property later.

Real estate is not a liquid investment. It can be time-consuming and pricey to sell, depending on market conditions.

You receive regular monthly income.

Other kinds of investments may pay out less often or income may be less predictable.

It may be difficult to finance the purchase.

You must have a down payment of at least 20% when you buy a second property.

What to Consider Before Buying an Investment Property Mortgage in Canada

What kind of property do you want?

  • Most first-time investment property buyers tend to start with condos and single-family homes.
  • With property, bigger is not always better. It likely means more taxes and more space to maintain.

What’s an ideal location?

  • Look for property close to schools, hospitals, public transportation, businesses, and retail.
  • Focus on neighbourhoods where demand for rental properties is strong and expected to remain so.

How is the local rental/job market?

  • A healthy job market will likely spur demand for housing and may result in rising rental income.
  • A growing area with major improvement projects planned could make the location more attractive to potential renters.

Does purchasing a property make financial sense?

  • Investing in rental property (or a rental property mortgage) should be considered a long-term investment that helps build capital.
  • Consider whether your real estate investment has the potential to provide a better return when compared with other investments.

Get the advice of experts

  • Assemble a team of professionals to advise you on real estate, legal, tax, and financial decisions.
  • Consider including an investment advisor on your team, as any property you buy will impact your asset mix and overall portfolio. That’s where Fundscraper comes in!

You can expect the interest rate on your mortgage for investment property, Canada specifically, to be at least 0.50% to 0.75% higher than the rate on your primary mortgage.

Investment Property Mortgage

Getting to Know More About Investment Property Mortgage Rates on Loans

Mortgage interest rates will always be higher on investment properties than on your primary residence. Lenders add this upcharge because they consider a rental or investment property mortgage — Canada markets included — to be a riskier loan product.

To protect themselves against the extra risk that comes with investment property financing, lenders charge a higher interest rate and have stricter qualification rules for borrowers. That makes it extra important to shop around and make sure you’re getting a fair mortgage rate on your investment property before you buy.

Achieving Your Long-Term Goals with a Mortgage on an Investment Property

Everyone has their own reasons for getting into property investment. What are your long-term goals? Do you have an investment target – a certain amount of money you’re hoping to make? This adds purpose and structure to your plans.

If you know your financial goals but aren’t sure how to structure your plans to meet them, that’s okay. We all start somewhere! Consider looking at past historical data and making reasonable expectations for the future. If you have information on how much properties like yours have appreciated in value over the years, you can make educated guesses about your financial future and estimated mortgage payment.

Are You Ready for an Investment Property Mortgage?

Assess your current financial situation to see if buying investment property makes sense for you now. Consider these questions:

  • Can you afford the sizable purchase price of real estate and still cover your existing financial obligations?
  • Is your credit in good standing?
  • Do you have the minimum 20% down payment you’ll need to secure financing?
  • Have you factored closing costs into your expenses?
  • If any repairs are needed to a property before it’s rentable, do you have the money to pay for them and the mortgage until you’re able to rent it?
  • If you have a primary residence, could it, or a line of credit secured against it, be used as a potential financing source?
  • Don’t forget that lenders will employ either a “Rental Add-Back” or “Rental Offset” to assess your ability to repay their indebtedness. Learn about each, but know that rental offset will always leave you in a better position than rental add-back.
  • Know that mortgage insurers will not provide mortgage default insurance on investment properties. Generally, it’s only available on residential homes worth under $1 million.

If you don’t want to manage real estate, or don’t have the money for the down payment and financing to buy the real estate, consider an alternative to a conventional mortgage.

Passive real estate investing in a mortgage pool may be a better option for you. You can even use your RRSP to fund your mortgage, which we call a self-directed RRSP mortgage investment property.
Contact Fundscraper today to discuss your options for investment property mortgage, Canada and beyond.

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The Role of the Credit Committee of an Exempt Market Dealer

The Credit Committee, sometimes called the Investment Committee, is a panel of individuals ubiquitously found in financial institutions, pension and endowment funds, credit unions, banks, insurance companies, and the like. Here, we’ll focus on the role and inner workings of the Credit Committee of an Exempt Market Dealer offering real estate products to the public.

Key Points

  • An EMD is a firm that has been licensed to distribute investment securities that are exempt from the rigours of a prospectus normally required by the Canadian Provinces in which it is registered to carry on business
  • The Board of Directors of an EMD normally establishes the Credit Committee comprised of senior management individuals with authority and relevant skill and experience. They meet regularly to consider new investments and approve, amend or turn away investment opportunities being brought forward under the auspices of the EMD
  • The credit committee serves as a natural buffer or safeguard against an overly enthusiastic promoter. An essential part of its mission is to protect the ultimate consumer of products offered to the public under the umbrella of an EMD

What is an exempt market dealer (EMD)?

An EMD is a firm that has been licensed to distribute investment securities that are exempt from the rigours of a prospectus normally required by the Canadian Provinces in which it is registered to carry on business.

EMDs may act as dealers for prospectus exempt securities sold to qualified clients. Typically, an EMD offers products covered by an Offering Memorandum (OM) which need not be pre-cleared by a Securities Commission. An OM is an issuer-prepared document purporting to describe its business. OMs assist prospective purchasers in their decisions of whether to invest in the securities being offered by the Issuer.

The Credit Committee does much of the “heavy lifting” for investors in evaluating the underlying merit of any investment opportunity.

What is a credit committee and what does it do?

The Board of Directors of an EMD normally establishes the Credit Committee comprised of senior management individuals with authority and relevant skill and experience. They meet regularly to consider new investments and approve, amend or turn away investment opportunities being brought forward under the auspices of the EMD.

The Credit Committee has a broad range of duties and responsibilities, including the obligations to:

  • Ensure regulatory compliance for each investment
  • Review regularly investment policies and recommend to the Board of Directors changes in policies, procedures, internal controls and underwriting guidelines
  • Promote wise investment and credit management
  • Rule on investment opportunities, taking into account credit, market, operational and legal risks
  • Ensure any investment is consonant with the EMD’s published investment criteria and policies

What is a loan officer?

The Loan Officer assigned to any proposed transaction is an experienced underwriter charged with presenting the investment opportunity to the Credit Committee, including all the supporting research. An underwriter’s main task is to assess the quality of an investment, its sponsors, and its inherent risks. Oftentimes, the Loan Officer’s presentation to the Credit Committee will have been previously vetted and endorsed by the Loan Officer’s supervising manager.

Why is it called underwriting? The term comes from the historical practice of Lloyd’s of London Insurance of requiring each risk taker (often for a sea voyage with risks of shipwreck) to put their “written” signature “under” the total monetary risk they were willing to assume in return for a fee. Hence the term “underwriting.”

It’s the credit committee’s job to approve, amend, or disapprove of an investment application.

How does a credit committee evaluate an investment opportunity?

Over and above its general obligations, on a daily basis, the Credit Committee is charged with evaluating potential investment opportunities falling within the EMD’s jurisdictional orbit. The review begins with the Loan Officer’s discussion paper, which includes a profile of the people behind the deal, its proposed terms, detailed analyses, and recommendations.

After deliberating over the Loan Officer’s underwriting report and completing any follow up interviews, the Credit Committee can approve, amend, or disapprove of the investment application at hand.

If the application is turned down absolutely or with amendments, the Loan Officer will advise the applicant accordingly. If it’s approved, a letter of intent will be sent. Upon acceptance by the applicant, a term sheet and commitment letter prepared by the Loan Officer and approved by the Credit Committee is forwarded to the applicant for signature and acceptance. The Loan Officer then will confirm that all due diligence and funding requirements are in order and that arrangements are put in place to fund the transaction. The EMD’s Legal Counsel will be retained to prepare and register the mortgage and/or any other security documents and ensure all conditions have been satisfied before funds are released. Barring the need for an extension down the line, the work of the Credit Committee is now done.

At this juncture, the EMD moves on to fulfill its regulatory obligations and attends to matters related to qualification of investors, suitability, conflicts of interest, disclosure, and more. It’s a complex process; the full treatment of these tasks is beyond the scope of this paper!

The credit committee serves as a natural buffer or safeguard against an overly enthusiastic promoter. An essential part of its mission is to protect the ultimate consumer of products offered to the public under the umbrella of an EMD.

What is due diligence?

Due Diligence, as applicable, covers many things, including:

  • The credentials of an Issuer or Sponsor
    The financial details of the proposed deal, including principal amount, yield, duration, and other salient features and conditions
  • Creditworthiness of the borrowers and/or guarantors, including credit checks, financial statements, personal references, and net worth statements
  • Third party reports such as valuation appraisals, architectural certificates, environmental reports, building condition assessments, geotechnical appraisals, and quantity surveyor reports
  • Leases, rent rolls, and estoppel certificates
  • Development budgets and construction schedules
  • Ability of the originator to fund budget shortfalls and need for a Deficiency and Cost Over Run Agreement
  • Zoning and building permits
  • Details of prior and subsequent encumbrances and availability of lender consents, if necessary
  • Assessment of loan to value ratios and other compliance with the EMD’s investment criteria
  • Evaluation of current competing market conditions for similar deals, including prevalent offerings by competitors
  • Timing of advances to the borrowers
  • Availability of collateral security
  • Builder’s risk and liability insurance
  • Validity of repayment schedules, as well as feasibility of exit route through refinancing or sale of underlying property
  • Evaluation of originator’s track record and project’s progress to ensure continued sustainability in case an extended term is needed
  • Location of the property, including marketability, condition, and value
  • Contemporaneous assessment of general economic and societal forces, including state of financial markets, existing and proposed government policies, local issues, and force majeure conditions
  • Review of commitment administrative and all incidental expenses and fees
  • Legal structure and supporting documentation

Meet the Fundscraper credit committee

Our team has over 125 years of experience in real estate development, finance, private equity, law, and technology. We’re proud leaders in our fields! Meet the Fundscraper credit committee here.

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5 Important Considerations Before Investing in a Mortgage Pool

Key Points

  • Mortgage pools are attractive alternative investments, as their safety profile can be adapted to meet the investor’s appetite for risk.
  • 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 to the Trust.
  • Mortgage pools are typically more flexible in their lending terms and will provide shorter-term loans, generally ranging from 6-36 months, than those offered through traditional sources. It is because of this flexibility and the higher risk of these loans that they charge interest rates that are significantly higher than prime rates used by banks.
  • The general rule of thumb is the higher the interest rate, the higher is the perceived risk of the mortgage investment. One way of assessing risk is studying the loan-to-value.

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 its underwriting criteria, which is usually described in the offering memorandum. If income and preservation of capital are your goals, pick a pool that has conservative underwriting criteria and consistently delivers good returns. Learn more about our underwriting criteria here.

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 to the Trust.

Mortgage Portfolio Composition and Concentration

A mortgage is registered on a landowner’s title to the property. This registration is called a charge. The charge details the interest of the lender, namely what is owed to the lender by the landowner, and that if the landowner fails to pay, then the lender may take the property and sell it to satisfy the debt. The lender who is first to register its charge is the first entitled to be repaid.

Mortgage pools are typically more flexible in their lending terms and will provide shorter-term loans, generally ranging from 6-36 months, than those offered through traditional sources. It is because of this flexibility and the higher risk of these loans that they charge interest rates that are significantly higher than prime rates used by banks. While the loans may be initially structured as short-term loans, they typically get renewed multiple times turning into multi-year mortgages.

The terms of the mortgages within the Diversified First Mortgage Pool vary between 6-18 months with borrowers having an option for renewal.

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 invests in single-family and multi-family residential assets in established neighbourhoods in southern Ontario.

Loan-to-Value of the Mortgage Portfolio

For most mortgage pool funds, a loan-to-value ratio of 70% 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.

The general rule of thumb is the higher the interest rate, the higher is the perceived risk of the mortgage investment. One way of assessing risk is studying the loan-to-value.

Fees and Expenses

Investors in mortgage pools sometimes pay higher fees that can reduce the payout amounts to you. Fees paid to the manager can be high and can include management fees, performance fees, and mortgage origination fees. On top of these 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.

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.

Have more questions about investing in a mortgage pool? Still not sure what all of the financial lingo means? We’re here to help! Schedule a call to talk through your real estate investment options today.

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6 Achievable Ways to Earn Passive Income from Real Estate

When you think of the words “passive income,” people often picture a man or woman sitting on the beach with a margarita in hand, watching their bank balance rise. However, unless you stumbled into a large inheritance, for most people, this is not reality. Passive income, like all forms of income, requires time and effort — it doesn’t just happen overnight! Now that we’ve squashed your financial fantasy, let’s talk about what passive income really is.

Key Points

  • One of the biggest benefits of real estate investment is that it’s a source of passive income. Our team put together a guide on the different ways to get started. It’s time to make real estate investing your new side hustle!
  • Income can be divided into two main categories: Active and Passive.
  • Unlike REITs, where your investment is placed in physical properties, with a MIC, your investment is placed in property mortgages.

Active Income vs. Passive Income

Income can be divided into two main categories: Active and Passive. Active income is earned by exchanging services — including wages, taips, salaries, and business income — for money. Passive income is divided into two subcategories: real estate and portfolio income. Unlike active income, passive income requires little to no involvement in the generation of income and is typically earned on an ongoing basis.

Understanding that everyone has different preferences, needs, and risk tolerances, we’ve compiled a list of ways real estate can help you earn passive income to achieve your investment goals.

Real Estate Investment Trusts (REITs)

REITs are one of the most popular real estate investment vehicles amongst Canadians and come in many shapes and sizes. They’re trusts that passively hold interests in real property, with at least 75% of the trust’s revenue coming from rent or mortgage interest from Canadian properties, as well as capital gains from the sale of such properties. Modelled after mutual funds, REITs are the next closest thing to owning real estate and finance a wide variety of buildings, including many shopping malls, office buildings, and apartment complexes.

Unlike traditional mortgages, REITs offer broad diversification with both equity and debt investment opportunities. Equity REITs derive most of their revenue from rent collection and can be found on both the public stock exchange, as well as in public non-traded and private markets. Debt REITs earn most of their money from interest earned in their investments in mortgages and mortgage-backed securities and tend to do better than equity REITs when interest rates are rising.

Unit Trusts

Many Canadians use unit trusts as structured vehicles to invest in real estate and share returns. By investing into a unit trust, your investments are handled by a fund manager who then uses its expertise to invest your money into a portfolio of assets. At Fundscraper, this is our bread and butter, with the Fundscraper Property Trust (FPT) offering Canadians the opportunity to invest in pooled mortgages. Pooled Mortgages consist of one or more mortgages that offer a similar return and loan-to-value ratio, meaning that you can invest in numerous mortgages that align with your risk appetite through one transaction. Our investors earn a monthly return between 6-11%, without having to lift a finger or visit a property. Intrigued? Learn more about the Fundscraper Property Trust here!

Mortgage Investment Corporations (MICs)

MICs offer investors an opportunity to pool their money and buy shares in their MICs. Since they invest directly in mortgages rather than property, MICs are less susceptible to the same unforeseen issues that may arise in physical properties. Additionally, a MIC may invest up to 25% of its assets directly in real estate, but may not develop land or engage in construction, and must have at least 20 shareholders.

Unlike REITs, where your investment is placed in physical properties, with a MIC, your investment is placed in property mortgages.

Mortgages

For many, the “M” word can seem like more of a burden than an investment. But in reality, it’s an investment into what a building owner needs to buy a home. Homeownership allows you to build equity and in many cases, real estate will appreciate, depending on the local market conditions. Investing in a mortgage, especially someone else’s, means that you are essentially taking on the role of a lender and the borrower must repay the loan with interest, usually each month. If chosen properly, these monthly principal and interest payments can offer a steady and predictable stream of income.

Mortgages are the most common and significant type of debt held by Canadians. Approximately 40% of Canadians have a mortgage.

Syndicate Mortgages

Syndicate mortgages have two or more investors investing in one specific mortgage, pooling their resources together to own a “piece of the pie.” When you invest your money into a syndicate mortgage, you become a secured lender and are recognized as a part-owner of the mortgage. It’s a fairly straightforward arrangement, and investors hold in proportion to what they contributed.

While it can be a great investment opportunity, it’s also important to note that there is no guarantee that the project will pay off. Syndicate members are generally expected to be sophisticated mortgage investors as they are not relying on the efforts of anyone else for a return on their investment. Investing in mortgage syndicates is for experienced mortgage investors only!

One of the oldest real estate “plays” is buying an additional property to earn passive income.

Buying Income Producing Properties

Whether it’s buying a student house in a university town or renting out a duplex in a residential area, owning a property can be lucrative, but typically requires lots of planning, management, and a large down payment. Standard bank financing will typically top out at 75% loan-to-value. While property management isn’t for everyone, for the few willing to do the homework, owning and managing an income property can complement an investment portfolio geared to generate income.

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Due Diligence Checklist Before You Invest in Private Real Estate

Today, there’s a wealth of options for accessing the market for investors of all kinds. Many investors struggle with the private real estate investment due diligence process. It can be intimidating and stressful to know where to start, what information to review, and how to determine whether or not a property is a smart investment. We’re here to make that process a lot less intimidating by explaining essential due diligence to-dos for investors, whether you choose a fund, service, or platform.

Key Points

  • Many investors struggle with the private real estate investment due diligence process.
  • Past performance does not guarantee future results, but looking at track record is one way to gauge an organization’s expertise.
  • Make sure you understand a service’s fee structure and confirm that it makes sense in light of the value the investment manager is creating for you using your capital.
  • People turn to real estate to improve their portfolio’s overall diversification. Public REITs are terrific products, but if your investment portfolio is generally made up of publicly tradable shares, you may lack diversification.

See If You Qualify

Before spending too much time envisioning your future with a particular service, be sure to check and confirm which kinds of investors it admits. For example, some funds provided by famous private equity real estate companies, like Blackstone, have a history of only admitting investors that meet certain salary thresholds, while newer platforms, like Fundscraper through Fundscraper Property Trust, allow anyone to invest.

Check Past Performance

Past performance does not guarantee future results, but looking at track record is one way to gauge an organization’s expertise. How has the manager fared in prior years? Did they show responsible custodianship over investors’ funds in the past? What does their portfolio say about their investment biases? How is their portfolio weighted? Each of these factors can help you determine what your investment experience might be like with a particular service.

 Due Diligence Checklist Before You Invest in Private Real Estate

Understand the Fee Structure

Every real estate investment has built-in expenses. In order to generate dividends, a property incurs ongoing fees, such as property management and future upkeep. Make sure you understand a service’s fee structure and confirm that it makes sense in light of the value the investment manager is creating for you using your capital.

Make Sure You Can Manage Your Investment

One of the big advantages of investing in real estate directly is that you never have any doubt about what your money is up to or how to track it. On the other hand, when you invest through a third party like a fund, partnership, or corporation, you can only track what they make visible. Now that most investment services are online, make sure you can interact with, manage, and evaluate your investment to your desired level of involvement.

 Due Diligence Checklist Before You Invest in Private Real Estate

Consider Diversification

People turn to real estate to improve their portfolio’s overall diversification. Public REITs are terrific products, but if your investment portfolio is generally made up of publicly tradable shares, you may lack diversification.

Public REITs in Canada correlate very closely with our public markets. When the markets go up, so do the REITs; when the markets go down, the REITs follow. Private real estate investment does not correlate with the public market. It’s one of the important reasons folks look to “anchor” their investment portfolios with private real estate investment. It sits at the bottom of your portfolio and chugs along, regardless of what’s happening in the public markets.

At Fundscraper, part of our due diligence is making sure you understand yours. Download our due diligence checklist template for real estate property investment here.

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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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Mortgage Investment Guide for Beginners and the Role of the Advisor

You’re trying to grow your nest egg, but you have limited capital and can’t risk losing too much. You want to do more with your money, but you don’t know where to start or who to ask for help. All the while, your savings account is earning next to nothing. Yep: You’re in an investing rut. And we can help get you out of it. It’s time to learn about passive real estate investing.

How can I passively invest in real estate? testing

There are many different ways to invest in real estate, both actively and passively. Passive real estate investing might sound intimidating, but it’s not as complicated as you might think. And no, you won’t have to perform any landlord duties. Passive real estate investing is an avenue many modern and savvy investors are choosing to explore. Passive real estate investing includes:

  • REITs
  • Unit Trusts
  • Mortgage Investment Corporations
  • Mortgages
  • Syndicate Mortgages
  • Buying income producing properties
  • If you’d like to learn more about each of these options, click here to read more.

Today, we’re focusing specifically on mortgage investing. Paired with traditional investments like stocks and bonds, mortgage investing provides stable returns and lower fees while mitigating investment risk. Careful real estate investment will give back substantially more than a savings account or a GIC and will often outperform popular mutual funds and exchange traded funds. Most importantly, it enhances diversification to a portfolio of publicly traded securities. It’s recommended that every investor, big or small, put some portion of their investment portfolio in private real estate.

Mortgage investing is a great way to passively grow your nest egg. It doesn’t require substantial upfront investment, but you’ll still earn stable monthly income and higher returns.


Don’t have enough upfront capital to make a downpayment on a house? Priced out of the housing market altogether? Worried you’re not saving enough for retirement? There’s still plenty of time to invest and save.

In this article, Fundscraper provides an investing playbook to show you how to invest as little as $5,000 in mortgages without the hurdles, obstacles, and barriers of traditional investing. Consider this your primer on mortgage investing. We want to empower you to get out of your investing rut and start growing your wealth. Here’s how to start building your real estate portfolio with a low upfront capital investment.

What is mortgage investing?

Mortgage investing isn’t buying a building or a piece of land. It’s buying (or investing) in what the building owner needs in order to buy a property: the mortgage! A mortgage is a loan that is backed up by the property the owner has purchased. If the borrower fails to pay you back, you can take the property and sell it to pay yourself back. A mortgage can be fractionalized, divided up, and everyone can take different pieces.

There are thousands of income products in our financial markets today. The oldest among the lot is mortgages and they remain today one of the top income products for institutions of all kinds and individuals seeking income. Therefore, a big concern for mortgage investors is whether or not the mortgagor (aka the borrower) can regularly meet its obligation to pay the interest the mortgage investment promises.

It’s time to start thinking differently about real estate investment.

How does mortgage investing work?

When you become a mortgagee—aka a person who lends money where the repayment obligation is secured by the property the borrowed money is being used to purchase—you lend your money out with the expectation that the money will be returned to you. To “secure” the repayment, the borrower gives the lender an interest in their property that will allow the lender to take ownership of the property if the borrower fails to repay the loan.

While the money is outstanding, the borrower will pay you a fee for the use of your money—in other words, interest. How much interest is paid by the borrower is decided between you and the borrower. The rate of interest is set on a yearly basis and the most common way it is paid is monthly.

There are three popular ways of investing in mortgages: public mortgage funds, private mortgage funds, and mortgage syndication.

  1. Public mortgage funds: You can invest in a publicly traded fund (meaning it trades on a public exchange and you can buy and sell whenever you please) that is made up of mortgages. Each are easy to access through your investment broker or through a direct investment account that is likely available through your bank. Yet the drawback of these investment vehicles is that they are publicly traded. If you don’t already have at least 20% of your current portfolio in the private real estate market, we recommend further diversifying your investment portfolio first via one of the two options below.
  2. Private mortgage funds: A private fund does not publicly trade, and once you invest your money, you might not be able to get it back right away. The returns on a private fund can often be significantly better than a public fund, generally the result of a unique skillset the asset manager brings to the mortgage fund. A licensed mortgage broker or securities dealer like Fundscraper can advise you as to which funds are most suitable for you.
  3. Mortgage syndication A mortgage syndicate is where you and one or more persons fund a mortgage directly. Investing in a mortgage syndicate is strictly for people who are experienced mortgage investors, as the investment return can be inordinately good or ruinous. When you invest in a mortgage syndicate, you acquire a direct fractional interest in the mortgage—you go on title! Mortgage syndicates are generally private, and good mortgage syndicators will only admit investors they know are sophisticated and are able to withstand the loss if the investment fails. To become part of a syndicate, one generally has to go through a qualified mortgage broker or securities dealer like Fundscraper.

 

 

3 Important considerations for first-time mortgage investors

  1. What are the risks?
  • No guaranteed high return. In general, the higher the rate of return, the higher the risk of the investment.
  • A lineup for repayment. If something goes wrong with the project, ask whether the syndicated mortgage is a first, second or subsequent mortgage. If the project fails, the first mortgage would receive any proceeds from the liquidation first. Second and subsequent mortgages only receive payments if and when the first mortgage has been fully paid off.
  • ‘Secured’ does NOT mean guaranteed. It is true that your investment will be used to create a mortgage that is registered and secured directly with the land or building associated with that mortgage. But, if something goes wrong with the project you may rank behind other lenders and investors and may not get your money back.
  • No investor protection fund. Syndicated mortgage investments are not backed by the Government of Ontario or any other investor protection fund; there is no way to guarantee you will get your money back.
  • Lack of liquidity. If you want to withdraw your money before the end of the term, there is no assurance that there will be a market for the resale or transfer of the mortgage.
  • Ask about the property value. Your security is only as good as the value of the property. Ask to see the appraisal the brokerage used to determine the value.
  1. How long will my capital be locked up?

  • Before you invest in a mortgage, you should consider how long your capital will be locked up in the investment. If you think you will need your money in the next 12 months, this probably isn’t the right investment for you right now. If you have money that you simply want to sock away and forget about, then mortgages are something you should definitely look at.
  • Mortgages have a term and investors who invest directly in a mortgage are expected to hang out of the entirety of the term of the mortgage. The term of a mortgage can be as short as six months or as long as the parties may agree. 12 months to 3 years tends to be the most common terms for mortgages in the private markets. 5 years is the most common term for a residential home mortgage offered by the banks.
  1. Will I get my money back?

  • When you lend money to someone, you do it on the expectation that the borrower will pay you back. If there is little likelihood that you will be paid back, then you probably would not lend. If you’re lending, you want to be aware of the borrower’s circumstance, which will give you some idea as to the likelihood of being repaid. If the borrower has a stable job, is known to pay debts when due, and repayment appears to be well within the borrower’s means, you have a good chance of being repaid.
  • A mortgage secures repayment. As a mortgagee, if the borrower fails to pay you, you’re within your rights to sell the property and earn a profit on the proceeds. However, a mortgagee can only take what they’re owed under the mortgage, plus any expenses enforcing the mortgage. If there’s any surplus, it must be returned to the borrower.
  • If you sell the property at a loss, in Ontario, the borrower will remain liable for the amount outstanding and owed to you. In some jurisdictions, especially in the United States, once the lender has taken over the property, the lender will have no claim against the borrower. It’s called a quitclaim, meaning the lender relinquishes its claim against the borrower.

Investing in mortgages wasn’t always simple. At Fundscaper, it is.

How do I get started?

  • Find a registered investment advisor. For a neophyte, investing in mortgages is complicated. Unless you have years of experience, you cannot do this alone. Registered advisors like Fundscraper make this complicated investment easy. The buying and selling of mortgages and investing in mortgages is all regulated by a lengthy set of laws. Registered advisors like Fundscraper know the way through the maze of this book of laws, regulations, notices and policy statements.
  • Check for a license. If you are investing in a fund or a pool of mortgages or into a mortgage investment corporation or a mortgage syndicate you will want or need the services of a registered securities dealer. Only mortgage brokers and agents licensed with FSCO can engage in syndicated mortgage transactions, and only licensed mortgage brokers (not agents) can sign the required forms. Find a licensed broker, agent or brokerage by checking FSCO’s list here.
  • Get independent advice. You are strongly advised to obtain independent financial and legal advice from someone not connected to the investment, before investing in a syndicated mortgage.
  • Read and understand all associated paperwork. Your mortgage broker must complete the proper paperwork and provide it to you. The brokerage must also keep appropriate documentation on file, including records that detail discussions with you. Before you sign, ask questions and make sure you understand everything.
  • Ensure full disclosure. Mortgage brokerages must take reasonable steps to ensure that the mortgage investment they recommend is suitable based on your needs and circumstances. They must also advise you of the material risks of the investment, disclose potential conflicts of interest, and provide evidence of the borrower’s ability to meet the mortgage payments

We invite you to speak to a Fundscraper dealing representative to get more information, learn about your investing options, and decide which investment strategy is right for you. Trust us: We’re experts. You can invest in real estate, and you can do it with as little as $5,000. Let Fundscraper show you how. Book a call with one of our advisors today.

When you invest with Fundscraper, you join a community of like minded investors exploring equity investments in mortgages. Get the feel of what it’s like to be a “mortgagee” (like, be a real lender golly gee!), without having to actually buy a mortgage!”

 

Start Investing in Real Estate Today

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Become a master of real estate investing! This playbook has inside industry knowledge that you can use to help generate passive income! Discover tactics used by the savviest investors, how to diversify, maximize your returns and avoid mistakes. It’s everything you need to know to invest like a pro.

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