Breaking Down the Offering Memorandum

When presented with long documents, it’s tempting to skim them, sign them, and hope for the best. But not so fast! Take the time to do your due diligence now to ensure you’re making smart decisions for your financial future. Our team broke down the basics of what every investor should know about that ever-intimidating document: the offering memorandum.

Key Points

  • What Is an Offering Memorandum?
  • Why Does an Offering Memorandum Matter?
  • What Is Due Diligence?
  • What Documents Can Supplement Due Diligence?
  • 3 Important Things to Remember When Reviewing the Offering Memorandum
  • 5 Important Questions to Ask When Reviewing the Offering Memorandum
  • What Are the Typical Components of a Prescribed Offering Memorandum?
  • How Do I Get Started?

If a company wants to raise money from investors, it will generally provide them with information about the venture. How the information is relayed to investors is governed by our rules regulating the securities industry. The rules vary per jurisdiction, but in general, securities regulators want to ensure that prospective investors know enough about the business to make an informed decision. This is a concept called “disclosure.”

One of the ways privately-held firms meet these disclosure requirements is to issue an offering memorandum (OM). There are two types of OMs: prescribed form and non-prescribed form. “Prescribed form” means the document must be prepared according to a guideline required by the regulators. This article breaks down the prescribed form of the OM.

What Is an Offering Memorandum?

An OM covers a substantial amount of legal and marketing material, including an executive summary, deal structure details, risks and disclosures sections, and an investor suitability form. It can be overwhelming to digest, but we’re here to break it down for you and highlight the crucial elements every investor should be aware of. You’ll likely find it useful not only for researching opportunities from Exempt Market Dealers (like Fundscraper!), but also private placement issuers, private equity and capital firms, and private mortgage funds.

In theory, OMs should provide investors with as much relevant information as possible. In practice, they’re complex documents written by lawyers for regulators.

Why Does an Offering Memorandum Matter?

Oftentimes, everyday investors don’t understand what an OM is or why they’re receiving it. They don’t have the experience or legal/financial/accounting training necessary to decipher 60+ pages of fine print—and that’s okay!

Since investors can only rely on an OM to make their decision, the reality is that many retail buyers do not know what they’re investing in unless they read the OM. They may grasp the general concept that they’re investing in real estate but be unaware of the minutiae that can alter the outcome of a deal. When they later discover unfavourable elements about the project, they often feel lied to and dismayed. Lack of awareness is one of the greatest risks associated with private investments.

At Fundscraper, part of our due diligence is making sure you understand yours.

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What Is Due Diligence?

An investor cannot make a good decision without knowing all of the facts. We call this “doing your due diligence.” You may want to understand the following before deciding to purchase:

  • Management fees
  • Investors’ voting rights
  • Indebtedness of the business
  • How the investment will be repaid
  • Conflicts of interest

All investors should know it’s impossible to disclose everything about an opportunity. A proscribed OM is designed by the regulators to deliver the minimum information the regulator believes a reasonable investor would require to make an informed investment decision.

With that in mind, use the OM as part of your due diligence before making an investment decision. You’ll want to investigate the industry, past performance, and the firm’s management team. Download the Fundscraper Due Diligence Checklist.

An Offering Memorandum is a crucial part of due diligence, but it’s just part of the equation.

What Documents Can Supplement Due Diligence?

The OM may refer to additional documents that prospective investors can receive upon request. For example, if the issuer is a trust (rather than a corporation or partnership), the OM might reference a declaration of trust or a trust indenture – documents that govern its mandate and management. You may want to understand exactly what the powers of the managers are and how the business must be run in far greater detail than what’s being disclosed. Investors should therefore scour through an OM for any mention of additional documentation.

For example, the OM may read, “ABC Trust will issue 1,000,000 trust units, pursuant to Section 4.1.3 of the Declaration of Trust.” While the declaration of trust is technically being disclosed, many investors will not realize that there is an entirely separate set of documentation that they should read before investing.

At Fundscraper, we aim to give you as much documentation, information, and transparency about properties in our marketplace as possible. The “Material Agreements” are available to you in the “Documents” tab of your account—see below.

3 Important Things to Remember When Reviewing the Offering Memorandum

  1. Regulators do not endorse investments.
    While an OM may reference securities regulators and state that it has been filed with the authorities, that should not be construed as being endorsed by the regulator as a good investment. The Canadian Securities Administrators, the body representing the 13 provincial and territorial securities regulatory authorities across Canada, are not responsible for performing due diligence on behalf of investors with respect to OMs. Rather, it and its members exist to protect the integrity of the capital markets and to enforce the law.
  2. Consider hiring independent counsel.
    While an OM may contain dozens of pages written by lawyers, accountants, and auditors, those professionals are representing the issuer, not the individual investor. Thus, investors should hire their own advisors before deciding to invest. Do not allow yourself to feel a false sense of security by knowing that the investment was assembled by professionals.
  3. Look for penalties, sanctions, and/or bankruptcies.
    An OM should disclose whether any members of management have any legal or serious financial blemishes. Use that information to help form an opinion about whether your money would fall into reliable hands.

Never make assumptions about a prospective investment. It’s best to hire an independent counsel to review the OM and the terms of the deal with you.

5 Important Questions to Ask When Reviewing the Offering Memorandum

  1. How are the funds being used?
    Never assume that all, or even most, of your money will be deployed into the targeted undertaking. The OM should disclose what, if any, fees will be paid to sales agents, how much will be advanced towards legal and administrative costs, whether there is any debt to service and how much will actually be deployed into the targeted undertaking. Moreover, investors should also understand what the continuing expenses of the venture will be over and above administration fees. These expenses can seriously dilute any available returns.
  2. How is cash being distributed?
    An investor should have a good understanding of how the fund receives income, how it intends to employ it, and how it will distribute any returns to investors. Once the underlying investments make returns to the fund, how much of those returns will be passed onto individual investors and how is that calculation determined? Do the managers earn a piece of the returns? Are there other parties that will share in those returns? Never assume that all or even most of the returns earned by the issuer will be passed onto investors. The flow of funds can turn a seemingly lucrative investment into a poor one.
  3. How liquid is my investment?
    Investments made via OM are less liquid than publicly traded securities on large stock markets. It is not uncommon for one’s capital to be locked up for a period of years in a given investment. Thus, an investor’s ability, or lack thereof, to sell the holding should be clearly disclosed in the OM. Note: Even in offerings where investors can easily redeem their shares, management usually reserves the right to reject redemption requests at their sole discretion.
  4. How am I being taxed?
    The tax implications of any investment are critically important for every investor to understand. What might be considered “tax advantageous” for one investor may be a disaster for another. (To complicate matters, investors and issuers are often taxed differently.) Where an issuer can provide a legitimate tax advantage to an investor, the investor must be fully aware of what the consequences might be if the issuer was to lose its unique tax status. Before investing, it’s important that the investor consult a professional about the tax consequences of the investment.
  5. What are your rights?
    As an investor, you can never assume that you have the ability to voice your opinions or influence management decisions. It’s important to search within the OM for your rights as an investor. For example, do you have the ability to vote, and if so, on what issues? How powerful is each individual vote? Can you attend annual general meetings? Are you able to request financial statements and other internal documents?

If you know what to look for and what questions to ask, you’ll be empowered to make smart investment decisions for your future.

real estate investment documents

What Are the Typical Components of a Prescribed Offering Memorandum?

The following are typical elements in a prescribed OM for a typical real estate investment in a hard asset like a building or development.

  • Executive Summary: Lays out the high-level description of the investment company (which may control or be the acquiring entity), its mission, the deal being pitched, a detailed description of the executives’ industry experience, and the deal financing requirements.
  • Location: If the OM is promoting a real estate opportunity, it will include the location of the asset. These images may include the property’s location on a map, an aerial view of the site, and a second map highlighting important places near the property such as an airport, public transportation, restaurants, and stores.
  • Investment Summary: Covers various subtopics, each of which has its own separate section and brief description.
  • Property Description: Describes where the property is located, when it was built, how large it is, any repairs it may need, and the current occupancy.
  • Purchase Price: The price for which the property will be purchased and how the purchased price will be financed.
  • Total Capitalization: Describes the “capital stack,” which shows the different layers in the financing of the project. Typically it would be first mortgage debt, next second mortgage, next preferred equity then finally equity. It’s really important to know where your investment dollars are in the “capital stack.” Traditional investment wisdom says the higher up you are, the safer your return.
  • Preferred Return: An investor who earns a “preferred return” means they will get a return on their money before ordinary investors. A “preferred investor” generally comes after debt and before a common investor. Preferred investors will have different return expectations than ordinary investors.
  • Projected Returns: Sometimes an OM will provide an indication of return. It is important for the investor to read the fine print wherever performance returns are disclosed. In a prescribed OM, certain kinds of “future-oriented financial information” must be prepared in accordance with strict guidelines. A licensed advisor can help an investor understand what is really behind an issuer’s projected return boast.
  • Manager or Sponsor: The sponsor company that controls the investment entity. This entity is often referred to as the “promoter.”
  • Property or Asset Manager: A description of the asset manager and their fees, which investors should review closely. They’re generally paid to the issuer, manager, and promoter before anything is paid to the investor.
  • Proposed Structure: The structure of the deal between investors, sponsors, asset management, and property management. An old adage to understand a deal is “follow the money.” Learn who gets paid what, and when.
  • Distributions: How surplus cash, i.e., the profits, are distributed to parties.
  • Acquisition Fee: This can be anything: a flat sum paid on closing; a flat fee plus a continuing interest. Always ask why are these fees being paid this way and if it’s reasonable given the terms of the deal.
  • Management Authority: How the manager holds control over the management and affairs of the property.
  • Proposed Use of Proceeds: How your investment dollars are being used. This could include acquiring the property, making repairs, and maintaining the property.
  • Estimated Sources and Uses: The amount of equity and debt to be raised, which then adds up to form the total sources of funds. Also included should be the uses of funds, including purchase price, closing costs, acquisition fee, working capital, and fronted capital expenditure.
  • Loan Terms: Where applicable or relevant, the loan terms section is broken into the following subtopics:
    • Loan amount: What is the approximate loan amount and the percentage of the purchase price it makes up?
    • Borrower: Which entity will be borrowing and what kind of company it is?
    • Interest rate: What is the locked interest rate?
    • Term: How long is the term? Is it a fixed rate or variable rate?
    • Amortization: Does amortization begin right away, or is there a period of interest-only servicing?
  • Competitive Set: A table depicting the competitors in the issuer’s market.
  • Industry Overview: Every industry is different, whether residential, retail, or another niche. This section describes what the specific industry for the property type is like in today’s market.
  • Market Overview: Similar to the industry overview, the market overview gives geographic-specific insight into the real estate market where the building is located.
  • Risk Factors: This section should include every risk related to the business, tax, accounting, and legality of the property. A typical OM includes 10-20+ risks and each one should have its own paragraph description.
  • Investor Suitability: Real estate deals frequently receive support from accredited investors. This last section in the OM describes what types of investors the deal is suited for, and may be based on rules and regulations with regards to investor accreditation or general solicitation. These are the guidelines that concern the investors’ financial status and their ability to bear the risk of losing an investment.

How do I get started?

As you can see, an OM is a complicated document. Don’t just rush through it and assume the best! Take the time to do your due diligence before you invest your hard-earned nest egg.

It’s critical to have a licensed dealer assess whether the investor is first eligible to participate in the investment and then, secondly, whether the investment is a suitable investment for the investor. That’s where Fundscraper can help!

If you’d like to learn more about private real estate investment, visit www.fundscraper.com and sign up. Once you are part of our community, you’ll have access to the resources our members enjoy that help them explore real estate investment!

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The Modern Playbook for Super Successful Real Estate Investing

Every winning team has two things: a great coach and a great playbook. At Fundscraper, our coach is Luan Ha, MBA, our founder and CEO. And he recently published “The Modern Playbook for Super Successful Real Estate Investing.”

What is the Modern Playbook for Super Successful Real Estate Investing?

Luan is one of North America’s leading real estate experts. His playbook — which you can download for free — is filled with valuable insights about putting your money to work. He writes in a conversational, easy-to-understand style, drawing comparisons to the sport of professional football: scouting, leading, game-planning, and play-calling. But you don’t have to be a sports fan to get a lot out of it. If you’re interested in learning more about real estate investment, this free resource is an excellent place to start.

A good playbook is the secret of success, whether in sports or business.

Luan methodically describes the background homework behind his playbook. In the “Tips and Quotes” section, he explores advice from industry icons that helped him find success. Very informative is the “Profiles of Best Investors” section, a look at the big players, banks, institutions, wealthy families, and pensions. Have you ever heard of the famous 20% rule of investing, practiced by the Yale University Endowment Fund? Luan will tell you all about it!

Luan’s 9 best go-to plays for successful real estate investing

At the heart of Luan’s playbook is his actual list of go-to plays. These are the real, tried-and-true methods that got him to where he is today:

  1. Do your Due Diligence – from creating a checklist, to relying on experts to make sure the “story” makes common sense
  2. Determine the Location Works – all the factors to bear in mind
  3. Assess the Fundamentals of Supply and Demand – key things to remember
  4. Understand the Zoning – useful rules of thumb
  5. Consider Debt as an Investment Vehicle – important considerations
  6. Carefully Analyze the Debt Leverage of the Project – a double edged sword
  7. Figure Out Your Real Estate Investment Style – match your risk appetite, liquidity, expectations and return objectives to the deal
  8. Maximize Your Exit Options – more are better
  9. Avoid Mistakes – automatic if you follow the first 8 Go To Plays

Luan is convinced his playbook will give you a leg up in making real estate decisions. At the same time, he recognizes that not everyone has the time or skills to make these types of decisions on their own. That’s where Fundscraper comes into play!

How to get started

Who are we? We’re a team of experts who can do the heavy lifting for you, but at the same time, leave it to you to decide which real estate investments are right for you. We’ll be your coach, or your cheerleader, or both. We’re here as much or as little as you need.

Fundscraper is on the cutting edge of technology and government compliance. We’re registered with and regulated by the Ontario Securities Commission and also falls within the jurisdiction of Financial Services Regulatory Authority of Ontario.

To quote Luan, “Go for the touchdown and pass the ball to Fundscraper.”

Start Investing in Real Estate Today

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Why the Alt A Residential Market Exists — and Why Investors Should Care

Experienced investors consider Alt A residential mortgages a great secured product, offering a higher return than Canada Mortgage Bonds and traditional first residential mortgages. Yet to the uninitiated, the Alt A residential mortgage market is just another real estate investment offering. We’ll explain what it’s all about.

Key Points

  • The risk in the residential non-conforming mortgage market is tradeable with the risk in the conforming market. The real difference between the two is that borrowers in the non-conforming market come with stories — they are “storied mortgages.”
  • Canada’s residential mortgage market can be divided into two segments: “conforming” residential mortgages and “non-conforming” residential mortgages.
  • Conforming mortgages have the benefit of mortgage insurance, but most non-conforming mortgages do not qualify for insurance.
  • Changes in the regulatory environment have resulted in a much stronger borrower entering the private mortgage market.

Canada’s residential mortgage market can be divided into two segments: “conforming” residential mortgages and “non-conforming” residential mortgages.

An overview of Canada’s residential mortgage markets

Canada’s residential mortgage market can be divided into two segments: “conforming” residential mortgages and “non-conforming” residential mortgages.

A conforming mortgage is either fully insured by one of the mortgage insurance companies, or which is a non-insured conventional mortgage with loan-to-value of 80% or less. Borrowers with these mortgages have strong credit histories and files that are fully documented in terms of income verification and other important aspects of the loan applications. Conforming mortgages often receive the best interest rates from mortgage lenders. Our Schedule A banks dominate the conforming mortgage market.

Conforming mortgages that have the benefit of mortgage insurance make up the backbone of what are Canada Mortgage Bonds. Our big banks don’t just sit on their mortgages. To generate further income for themselves, lenders originate mortgages, pool them, then sell the pool as mortgage backed securities (MBS) to the government. To pay for the MBS, the government sells Canada Mortgage Bonds (CMBs) to investors (think pension funds, insurance companies and the banks themselves).

If the borrower is using mortgage financing for the purchase of a recreational property or housing for a family member, or the borrower is purchasing a residence for investment purposes, then the mortgage issued the borrower would be described as “non-conforming.” If the borrower has not yet established a credit history generated in Canada, that borrower will generally only qualify for “non-conforming” mortgage financing, i.e., the Alt A mortgage market.

Conforming mortgages have the benefit of mortgage insurance, but most non-conforming mortgages do not qualify for insurance.

What is the Alt A mortgage market?

Historically, there was a divide in the residential mortgage market. The mortgage was either “A” or it wasn’t. To be an “A” residential mortgage, the borrower had to meet a very rigid criteria set by the Schedule A banks which at minimum required a three-year employment history with the same employer, income verification, three years of clear Income Tax Notices of Assessments, and a credit score 700+.

The principal reason for the rigidity was to ensure the residential mortgage would qualify for mortgage insurance. The borrower had to fit within the “box.” Any borrower that did not fit within the box would have to seek out “alternative” mortgage financing. As time passed, folks who did not fit within the box, yet had good credit, came to make up what we call today the alternative or “Alt A” mortgage market.

The risk in the residential non-conforming mortgage market is tradeable with the risk in the conforming market. The real difference between the two is that borrowers in the non-conforming market come with stories — they are “storied mortgages.”

Who invests in the Alt A mortgage market?

The Alt A market, which caters to non-conforming mortgages, has proven to be an appealing mortgage investment opportunity for a variety of people, including:

  • Contractors, entrepreneurs, and small business owners who have volatile income and have a difficult time retaining traditional bank financing
  • Borrowers with challenging credit history
  • Asset accumulators who invest heavily in rental properties and have ‘too much debt’ on paper, making them riskier to schedule A banks
  • Investors purchasing income properties or second properties for family/recreational use
  • Those acquiring certain rural and agricultural properties that have residential components
  • “New to Canada” immigrants who are likely to find jobs, form households, and buy homes, but do not have credit history in Canada yet

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.

Who borrows in the Alt A mortgage market?

The people most likely to use Alt A mortgages are what we call “New to Canada.” They’re immigrants who are sought after under Federal and Provincial immigration programs designed specifically to attract those persons who possess a specific skill or trade. They are the immigrants most likely to find jobs, form households and, ultimately, buy homes. But they do not have credit history in Canada, thus the name “New to Canada.”

Other borrowers in the the non-conforming residential first mortgage market are generally persons with a challenging credit history, investors purchasing income properties, and persons purchasing second properties for family or recreational properties. The acquisition of certain rural and agricultural properties that have residential components also fit in this category.

What are the risks of investing in the Alt A mortgage market?

Most non-conforming mortgages in the Alt A mortgage market do not qualify for insurance. Therefore, pools of nonconforming mortgages cannot be collaterialized for the purposes of issuing MBSs. Because non-conforming mortgages are typically riskier and more difficult to handle, the lender will charge the borrower more. Further, as the non-conforming mortgage does not have to comply with any restrictive guidelines, the lender may allow a higher loan-to-value than if it was a conforming mortgage. The lender may also entertain borrowers with less than ideal credit history and loosen any income verification practices it employs, especially with respect to borrowers that may be self-employed or have alternative sources of income rather than traditional employment income.

Yet, apart from these differences, the underlying real property security for non-conforming mortgages may be at least the same as for conforming mortgages in that they may be located in desirable marketable areas and well maintained at the date of underwriting. Non-conforming mortgages may also carry many of the same characteristics as conforming mortgages in that the security may be the same; they may have the same payment frequency; and the loans may be amortized resulting in a recapture of capital for the lender throughout the mortgage term.

Changes in the regulatory environment have resulted in a much stronger borrower entering the private mortgage market.

Changes in Alt A mortgage regulation through the years

15 years ago, a borrower’s mortgage could qualify for mortgage insurance at a 95% Loan-to-Value (“LTV”) and an amortization period of 40 years. Employment income used to qualify for a Mortgage did not always have to be fully confirmed and/or documented and credit scores could be as low as 580. That’s no longer the case.

Regulation has evolved. LTVs are lowered and amortization periods have been shortened. In July of 2020, CMHC increased the credit score requirements of borrowers with less than 20% down payment from 600 to 680. That knocked out a huge fraction of the borrowing populace. With a sub 680 score and no insurance, that band of borrowers will have extraordinarily difficult time retaining traditional bank financing. Now, that group looks to the alternative mortgage market.

Private lending can be quite lucrative for both lenders and their investors. And in the Alt A or “non-conforming” residential first mortgage market, it can be reasonably safe as well.

The future of the Alt A mortgage market

As the rules have become much more stringent (and the types of properties insurers are willing to cover have narrowed), borrowers are looking for alternatives. Alternative lenders are desperately trying to fill this void created by regulation. Today, they can offer their investors secure long term returns of 6% to 8% (and sometimes more) simply because there are so few options for persons forced out of the traditional mortgage markets by regulation.

Canada enjoys one of the strongest real estate markets in the world. Whether the borrower is “new to Canada” or is simply the square peg that doesn’t fit Big Bank’s round hole, the Alt A mortgage market has proven to be an appealing mortgage investment opportunity for adventuresome investors who like good stories.

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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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