Why you may want to consider investing in a condo instead of RRSPs
As RRSP season approaches, many of us feel the need to move all of our savings into stocks, bonds, and mutual funds to reduce our income tax burden. Upon further analysis, many feel they're not seeing the results they want from this type of investment.
Here are the four reasons why you may be hesitant to invest the majority of your savings into RRSPs
You’re not particularly knowledgeable about or interested in RRSP investment options
While I do have an average amount of knowledge when it comes to stocks, bonds and mutual funds, as hard as I try, I just can’t get excited about them. The result is that I’m not particularly motivated to manage my RRSP portfolio. Therefore, I’m left to entrust my money with a financial advisor, which I’m not entirely comfortable with.
You haven’t found a financial advisor who inspires confidence
In theory, I’m not opposed to handing my money over to an expert to invest for me. However, I do have an expectation that they’ll do a better job of growing those funds than I can. Unfortunately, I just haven’t had that experience; I’ve worked with financial advisors at the branch level and with seasoned wealth managers at full-service investment firms and none have been able to consistently generate a reasonable rate of return, which in my mind is between 5 and 7% per year on average. Typically, I’ve found that after accounting for all the fees, I’m lucky if my money grows at a rate of 2 to 3% annually.
A 2 to 3% return your money leaves you at the starting line
The intended advantage of an RRSP is that it allows you to grow your money tax-free until you’re ready to withdraw from the plan – usually at retirement. The goal, of course, is to end up with significantly more money than what you started with.
The problem though is generating returns of around 2 to 3% annually is essentially the rate of inflation. So really I was seeing zero growth in my money.
This is hard to swallow when real estate in Ottawa has been appreciating at a rate of _ % per year on average over the last _ years. When you also account for the fact that a tenant will be paying down your mortgage, plus any positive cash flow, the return on invested capital over a 10-year period can easily climb into the triple digits.
Tax deferral is not a strategy that makes sense for you
An RRSP in it’s simplest form is a tax deferral strategy. Contributions are tax deductible and investment earnings can grow over time without being taxed until you withdraw from the plan.
If you’re making a lot of money during your working years and are likely to see your income drop significantly when you retire, RRSPs could make sense. Your marginal tax rate would be drastically reduced and you would theoretically pay fewer taxes in the long run.
But what if your income is high now and stays high when you retire? The end result is that you would pay the same marginal tax rate on your money. So, you might as well pay the taxes now and put your money into investments that will generate a reasonable rate of return with an acceptable level of risk.
Here are three reasons why you may prefer to invest in a condo
1. Real estate investing interests you more than RRSPs and as a result, you’re more motivated to learn without it feeling like work.
2. When you invest in a new condo, you can select the neighbourhood, the building, and the floor plan and once the property is complete, decide whether to sell or rent, who to rent to, and how long to rent for.
3. Real estate is one of the most accessible ways to take advantage of leverage. Leverage is the use of borrowed money to increase the potential return of an investment.
Consider the purchase of a property with 20% down, or $100,000 on a $500,000 asset. Assuming the property appreciates 25% over 10 years or $125,000, the buyer would realize a 125% return on his down payment.
Return/Invested Capital = $125,000/$100,000 = 125%
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