The marketplace revolution comes quietly, one house at a time.
It’s founded on relationship, trust, security and other words increasingly foreign to players in the big world of stocks and mutual funds.
Terry Regenwetter, part-owner of Edmonton-based ROI Equities Inc., owns about 25 homes, eight (a few yet to close) of which were made possible through arm’s-length RRSP contributions placed on second mortgages.
But the investors who are handing Regenwetter cash to buy houses (generally fairly new dwellings in the $200,000 range) aren’t being hit by the shakes during the transaction.
|Terry Regenwetter, part-owner of ROI Equities, says some burned stockholders are looking for new places to invest.|
Their money is secured against Alberta real estate and protected from the taxman by RRSP legislation in a unique single investor-to-single borrower scenario.
Uncovering the information on one of Canada’s best-kept investment secrets is like traversing a remote Rocky Mountain trail.
The simple beauty of it would seem to warrant mass advertising – yet the scarcity of people on the path is half the charm.
Self-directed, arm’s-length RRSPs are not to be confused with the more popular non-arm’s-length RRSP mortgages (allowing individuals to invest in their primary residence within a CMHC-insured mortgage) or real estate investment trusts (pooled capital invested in real estate and traded on major exchanges like stocks).
Though it’s been possible to include these self-directed RRSPs in any Canadian’s portfolio for about 10 years or more (they seemed to emerge from the fog at a little-known date), the profile has been kept low without any major banks or trust companies putting effort into their promotion.
Brokers only receive administration fees for setting up mortgages and dispersing payments, unlike mutual funds – which usually provide some form of ongoing compensation.
With the recent smoky world of stocks putting a lot of capital out into the streets, companies like Canadian Western Trust (CWT), the major player in arm’s length mortgages in this neck of the plains, have seen the trend developing and are quietly capitalizing on it.
“This is, by and large, a sophisticated investment
strategy,” says Rob Nakoneshny, CWT director of sales and marketing for the prairie region.
Traditionally used by individuals of high net worth savvy in the real estate market, it is now moving to a broader audience.
Regenwetter was put on to the idea through the Alberta Real Estate Network, whose more than 300 members are actively being educated in the use of RRSP funding.
CWT has doubled its holdings to more than $1 billion during the last three years, with more than half of that coming from mortgages (arm’s length mortgage being the largest portion), says Nakoneshny.
“Banks have tightened up borrowing policies,” he notes. The frigid policies tend to rely on formula-based lending,
further enhancing the desire for self-directed RRSP
funding by increasing real estate investors’ needs for
The process of connecting investor and borrower is
relatively simple, though not as well honed as other, more time-tested, procedures.
Regenwetter cautions that it’s not an overnight
transaction, suggesting a three-month timeline from initial investor communication until a deal is signed and sealed.
That allows time for the parties to establish a relationship, negotiate the mortgage terms (similar to negotiating a bank mortgage, only person-to-person), forward the documentation to the lawyers for drafting and then have it passed on to the trustee.
“We don’t close any of our RRSP funding without
having our investors get independent legal advice,” says Regenwetter, who works in partnership with veteran real estate investor and owner of more than 100 homes, Arlen Dahlin.
If the real estate investor defaults on a contract, the cash investor can foreclose on the property. But foreclosure is not much of a problem in Alberta’s current market.
“If someone can’t make their payments and the value of their property is increasing, they can always sell off their property and pay off what they owe,” says Nakoneshny.
Though safeguards exist and the strategy the approval of Revenue Canada, it is not for everybody.
Administration fees favour the wealthy investor and
borrowers like Regenwetter prefer going through the education and legal hoops with those wanting to invest $100,000 or more.
Investors can expect guaranteed returns of from eight to nearly 20 per cent, depending on their negotiating skills and the dynamics of the deal. Add the tax savings and there’s reason to smile.
Regenwetter says he likes the fixed-rate aspect of the arm’s length mortgages. The end term value on the dollar can be calculated at the outset, providing the investor with a solid expectation and the borrower a rigid number to download into the monthly expenses.
Arm’s length mortgages in self-directed registered
retirement savings plans – a long journey for the tongue that just may be worth tripping over.