In this second piece on RRSP Mortgages, I will cover the 5 steps involved in setting up a mortgage within your Registered Retirement Savings Plan, which banks you can select as your administrator, and a word of caution to help you steer clear of the most common pitfall when putting this strategy to work. If you haven’t heard of RRSP Mortgages yet, see RRSP Mortgage Basics – Part 1: Pros and Cons to learn why this can be such a great strategy for building long-term wealth.
5 Steps to Setup Your RRSP Mortgage
- Create a self-directed RRSP account
Using a Canadian trust company, you’ll want to set up a self-directed RRSP account where you’ll place your funds to be loaned out. I’ve outlined a few trust companies below which can serve as the administrator for your loan.
- Find a borrower
Most people find this step to be the toughest part of setting up an RRSP mortgage. How do you find a trustworthy party to lend your RRSP funds to? You can advertise in your local newspaper or online, but the best way is through networking. Start by attending your local real estate investment club and you’ll be sure to find plenty of investors looking for money. Make friends with the other members and you’ll be able to get a good handle on who is reputable and who to stay away from. From here you just need to find an investor whose capital requirements match the amount you’d like to loan.
- Do your due diligence
If you’re going to be the bank, then you shouldn’t skip any of the steps that go along with being the bank. After finding a suitable borrower, you’ll need to complete due diligence on both the borrower and the deal. When it comes to the borrower you’ll certainly want to check their credit, run a background check and verify their personal and real estate income just as the bank would. With respect to the deal, you need to verify all of the facts and will want to see documentation of any existing mortgages, leases or other agreements that are in place, check yourself that the property is in a good area and get an appraisal to determine fair market value.
- Structure the deal
Since you are playing the role of the bank, you get more say in what the terms of your deal will be. The loan amount, term, amortization period, interest rate, fixed or variable decision and any other details like upfront fees or prepayment penalties are all yours to determine. Work with your borrower to structure a win-win deal that will make sense for both of you. Remember, the higher the LTV, the higher the interest rate and fees you can charge.
- Fund the deal
Once you’ve setup your self-directed account, found the right borrower, and agreed upon your terms, it’s time to fund the deal. At this point your lawyer and administrator will handle the closing details. Be sure to move the required funds to your self-directed account in advance of closing so they will be ready on the agreed upon date.
Once your deal is funded, your RRSP mortgage investment becomes fairly passive. If a payment is missed, you’ll be notified and may need to get involved. Otherwise, you get to sit back and earn your return while your borrower makes payments to the trust company and decide how to invest the returns that begin to trickle through to your self-directed account.
5 RRSP Mortgage Administrators
The following is a list of trust companies in Canada that will administer RRSP mortgages:
- Laurentian Bank of Canada
- TD Waterhouse Canada
- B2B Trust
- Olympia Trust Company
- Canadian Western Trust
Some companies will also allow for non-arms length borrowers, but this process comes with additional hoops and hurdles as well as increased fees and is generally not worth the hassle.
A Word of Caution
Regardless of which side of the RRSP Mortgage coin you find yourself, due diligence is of utmost importance. The most common pitfall with this strategy is that conflicts can arise when the goals of the two parties are misaligned.
As a real estate investor, you must do your due diligence on the lender, and be sure to disclose everything. By presenting your lender with all of the facts, you allow them to make an informed decision and start your relationship off on the right foot. As long as you are completely honest and make your payments, many lenders will be interested in funding your future deals.
As a lender, you must do your due diligence on both the borrower and property. With all of the facts in hand, price your funds according to the risk. Don’t skimp on checking the facts when it comes to lending your hard earned money, and above all, trust your gut feel on which borrower and property are right for you to work with.
photo credit: LadyDragonflyCC – Tinsel Time!!!!
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