Not sure why recently, but I’ve been talking a lot about how to use your RRSPs to invest in mortgages.

Most bankers or stock brokers will probably look at your funny if you ask them about this. This is probably just outside of the limits of their understanding. They will give you the standard answer of “you can only invest in stocks, bonds or mutual funds”. The reason behind this is obvious, this is where THEY make the most money. Investing in a mortgage would give you the power of the bank and make YOU money… inside your RRSP so it’s tax free. Some banks would see this as a threat and tell you it can’t be done.

For the most part, they may be correct as well as only certain institutions allow you to hold a mortgage within your RRSP.  The three that I am aware of or at least are set up to do this and have folks that understand and are willing to assist are, TD Canada Trust, B2B Trust (division of Laurentian Bank) and Olympia Trust. Each it turns out has it’s own strengths and limitations. A simple example is, TD will allow for a mortgage to be registered on a Quebec property even though I am in any other part of Canada. Laurentian, even though they are based in Montreal, wont allow “cross border” mortgages.

Side note: Have I ever mentioned how really different and challenging it is for me to get financing in Quebec? I have done it and continue to do so, but have found that I am part of a very limited set of brokers/agents who can. Proximity is the key and having national lenders is the other. It’s always the first question I ask of new to lenders.  The answer is always no (with a few exceptions). The rules are you have to have some base of operation in Quebec to lend in Quebec. I’m sure there are other hoops as well, but that’s the biggest one.

I digress. Back to RRSPs

So, how is it all done you ask?

Well, technically, thanks to the new legislation in Ontario at least, it has to be done through a mortgage broker/agent. Most provinces are heading this direction (regulating the industry), so look for it in a province near you.

Here’s a typical scenario. We have a property owner who has a first mortgage in good standing. Has run into credit problems for whatever reason. Can’t refinance, but has equity in his home. It will likely take them 2 years to straighten everything out, but meanwhile needs to use the equity to lower his monthly costs, pay off his outstanding credit and get on with life.  In 2 years, should be able to refinance to pay you out.

The house is worth $200K and he has a first for $100K. They need $40K to get caught up on everything. You have $40K plus in your RRSP and agree to register a 2nd mortgage at 12-14% either principal & interest (P&I) or interest only. I prepare the mortgage docs, which include enough detail for you to calculate your risk vs reward and allow you to go out and view the property and/or interview the owner if need be. Most often you will get the bigger picture from the data presented (i.e. appraisal & credit bureau), but some like to add the personal touch.

Once you agree to the mortgage undertaking, we get in touch with your lawyer and he prepares the remaining documents, contacts whichever institution you hold your self-directed RRSP plans with and registers a new 2nd mortgage on title. Your investment is now secured by real estate. It’s not going away anytime soon and it has to have insurance.

The institution collects payments via pre-authorized payments on your behalf and you watch your RRSP grow at 12-14 (or more) percent.

I threw a little twist in there for those that were paying attention. Yes, your funds must be in a self-directed account. How do you know if it is? It’s the proverbial, if you have to ask then likely you don’t have it in the correct account. Believe me you’ll know you have it in a self-directed account as there will be plenty of paper work to fill out and the statements you get from the institution will have it clearly labeled.  There will be some effort to get this done as it is expected you will want to invest this “cash” in some vehicle and not leave it there sitting not earning interest.

Fees. Here’s the really cool part. Who ever borrows the funds pays all the fees and you get to set what your “lender” fees are! You have the option of getting paid these fees inside or outside of the RRSP. You probably want to cover your internal fees (i.e. $250 setup and $150/year maintenance) so that you don’t lose money in your RRSP each time you do this, but that’s up to you to calculate if the interest earned more than covers the fees.

The lender even has to pay for your legal fees. Typically they are deducted from the amount forwarded, but it doesn’t come out of your pocket.

While we’re at it, I also get to charge a broker fee. This is the part I like. If I’m doing my own deal, I can charge a lender fee & broker fee. All perfectly legal.

What has happened in the past is sometimes the amount borrowed is increased to cover these fees, so that the borrower actually gets enough to pay all the bills and isn’t given a new bill on top of everything. So in the scenario above, the loan amount goes to $43K to cover fees.

For first time investors, maker sure you don’t go above 85% loan to value (LTV). Why? Look at the worse case scenario. The borrow stops paying and you personally take the property to power of sale in order to get your investment back. You want a quick sale, thus the price must drop below market to make it attractive to buyers, say 5-10% and you have to pay an agents commission 5-6%. Add up the numbers and that’s 15% off the value and possibly dipping into your investment.

If you have a lot of faith in the borrower or property for whatever reason, you can consider 90% LTV, but for the added risk to you, increase your rate to 14-17%.

Remember this is still less than the 20-30% being charged by the credit card companies and the 3% minimum monthly payments the need to make and it’s only for a couple years until they can refinance the whole thing to a lower rate.

It’s that time of year where all the brokers and agents get together for… well some might call it a massive party… the annual CAAMP conference. Although I’m sure most will say they go to find out what the new product offerings are from the various lenders in attendance. Meet the underwriters they’ve only ever spoken to over the phone. etc. etc.

I equate this to the equivalent of folks who say they buy certain men’s magazines “for the articles”. (insert your own rim shot sound effect here)

But seriously folks…(Take my wife…. PLEASE -Rodney Dangerfield)

In the previous broker office where I worked, there were two camps (not CAAMP, no pun here). Those that looked forward to this event as a chance to get away for a few days and see all their old buddies or make new friends. They’ve worked hard all year and this is a form of reward for them. On the flip side we had folks that viewed CAAMP as… well how can I put this nicely… a tax with no form of representation that does little to improve their bottom line or their market perception.

In the new brokerage office I’m in, I see a very different attitude. I see from the start one of our own who wants to get elected to the board in order to effect changes for the good of all brokers. I’m glad to see there are people willing to work with and within the system in order to improve it, rather than sit around and complain about it and get nothing done. It’s the only national body we have we can either work to fix what is broken with it or let it continue to flounder. Strong leadership is the correct solution. At least I don’t see any other organization trying to form a national presents to compete.

I think, or at least have to hope, that CAAMP is changing or evolving. It was and mostly still is a collection of bankers and the brokers that worked for those institutions. The past presidents have all been a senior bank executives. I’m not sure who the new president is, but I’m thinking that eventually if we get a president who is not a career banker and has been in the broker business for a couple decades then we might start to see some real changes to the organization. Things that will benefit all brokers in the business.

I have to hope that this is the vision for Mortgage Alliance and they understand that in order to get someone that could become president that first you have to show you are part of the team by having people on the board and then you have some hope of having an experienced broker become president. I like it when people have a plan. They tend to succeed.

As for me, I try not to complain to loudly. I have a list of things I would like to see changed and if I manage to build my business to the point where I can put the time in to be in the place to effect change, then I will certainly do so. Until then, I pay the tax and watch to see what my company does and follow their lead and hope for the best.

While I’m hear, I also want to throw in that I’m starting to see all kinds of FUD marketing (Fear, Uncertainty, Doubt). On the one hand we have the bank of Canada re-stating that all is well (not really, but that’s what they have to say as they can’t raise their prime without killing the entire economy) and that they wont be raising prime until at least next summer (some are speculating much longer as growth has barely started). In contrast with advertisements saying that these low rates wont last forever, renew now before you get caught. OR rates have never been this low before it can’t last much longer. Act now before it’s too late! I almost fully expect them to say, “and if you call in the next 15 minutes, we’ll throw in a car loan at 0% interest”… “how about a lovely clap chopper” … “don’t pay for a year”… “operators are standing by” (please let them sit down ).

When all else fails in advertising, why do they still move to fear based selling? Low rates didn’t work, how about building a brand that people will come to know and trust? Guess that’s too much of a concept for advertisers. Short term pain, long term gain. Doesn’t fly with our instant microwave culture.

With the changing of seasons and the cool weather seems to cool down the real estate market. Except of course where I am it seems like summer has just arrived. We’ve waited through the rainy season. It’s about time! Someone should let mother nature know that it’s November.

How rainy was it this summer? It was so rainy, I didn’t realize I had a significant leak in my above ground pool until late September when we had 24 days without rain.

I digress.

Guess what I’m seeing this week? Rate (rain?) drops. The “downpour” of emails has just started. Business has slowed just enough that incentives have started to crop up. I predicted this in a previous post. It’s a few weeks earlier than I anticipated, but welcome nonetheless. First email I received announced a 15 Bps drop across all 5 year fixed rates.

It seems that generally people stop focusing on buying real estate and focus either on getting things ready for the winter or maybe, just maybe they might be focused on Joly old St. Nick and sharing with others. Certainly the Christmas party invites have started.

Time to start thinking about tenant appreciation. They have after all been paying your mortgage for the last little while. What a welcome surprise it would be for them to receive a gift certificate to a local restaurant.

I think my real estate group (I say my as my wife and I founded it many moons ago) has come of age. Call it a maturity of sorts. We had two speakers come in and show us how they analyze deals. The first speaker, who has been with the group for many years, came as a slight surprise. I was fully expecting him to present the “company line” way of how to purchase commercial (res) deals. He was a mentor with Whitney/Kiyosaki and generally followed their method of teaching. I said “was” as he is now an independent mentor and investor. Why was it a surprise? Normally presenters provide a slightly… hm.. how shall I say this… tainted view of the world? More of a sales pitch than an actual, this is how things work in the real world. Not this time. He took two deals that different people sent him. Filled in his spreadsheet with the details from the listings and showed us how he analyzes the deals. He then adds in his own mix of reality (like real life expenses that no one ever includes) and showed us that neither of the deals were particularly attractive. The second property was “close” in his words, but the offer he was going to make for the numbers to work (i.e. cashflow from day 1) would be significantly less.

On the financing side of things, he clearly stated that no bank would go above 65% loan to value (LTV). He did mention the possibility of a vendor take back (VTB), but didn’t stress it and didn’t even talk about how he would raise the funds for the remaining 35%. Leading the audience to believe that you need cash if you are going to invest in commercial. I couldn’t agree more! He even cautioned people to start with smaller projects before considering moving into commercial. Hallelujah! His words were, if you make a mistake on a single family home, you can probably recover over time. If you make a mistake on a commercial deal, in all likelihood you will have to go bankrupt.

The second speaker got up and almost reiterated what the first speaker said. His focus is single family homes. He had a totally different approach than the first speaker, but the underlying message was the same.  Don’t get in over your head. If something happens, then you are the one responsible to fix it. His key message, have a plan. The old quote came out “not having a plan is a plan to fail.” He certainly has a plan. Tightly focused. Only looks for certain kinds of homes and certain kinds of tenants.

Part of that plan is welcome baskets when tenants move it (an echo from last months property management speaker) and a gift card at Christmas for all tenants for a dinner out.

These are the kind of speakers I enjoy and want to see more of coming from this group. All ships rise with the tide of professionalism presented this month.

My hat is off to the executive of OREIO this month. Keep up the good work despite all the obstacles I know you are battling.