Q: Hi, I have $38,000 in my TFSA and I am looking for investments that don't involve mutual funds or stocks. Any alternative investments that you would recommend?
Asked by T.H. from Toronto, ON
Stocks and mutual funds have long been the top choice of the majority of investors. Increased diversification, professional investment management and convenience of mutual funds have attracted millions to invest their life savings hoping to make great returns one day. That hope, however, has been accompanied by management fees eating into returns, less predictable income and financial crisis that led Canada's stock market to lose 35 percent of its value in 2008.
Those disappointed with the meager returns and the sheer fear of losing money due to volatility have started to explore alternatives to mutual funds and stocks. For many, real estate has become a solution.
If you are looking to invest using your TFSA and RSP accounts, then real estate is a great alternative for you too. Most Ontarians only know how to withdraw RRSP funds under the Home Buyers Plan without realizing that they can invest in real estate using registered and tax-free accounts through mortgage investments.
The specific mortgage investment that you should look at is called a Syndicated Mortgage. Those investing in syndicated mortgages are essentially funding real estate development projects (condos, low-rises, commercial plazas, etc.) by lending money to developers.
Typically a construction project would be funded as follows: 15 percent of funds comes from a real estate developer, 25 percent from syndicated mortgages and 60 percent from a bank.
Yes, that's right.
In syndicated mortgages, you invest alongside some of the soundest banks in the world. Syndicated mortgages come with a handful of benefits:
- The minimum rate of return is 8 percent per year. It's higher than GIC, inflation rate, and the average rate of return in the equity market.
- You pay NO management fees.
- Your name is registered on a title of the property which means that you now have collateral to claim against in case something happens.
- The return is predictable, consistent and steady: mortgage investments are not directly exposed to volatility in the equity market.
- Syndicated mortgage investments enjoy the same benefits and use similar simple risk mitigation strategies as real estate.
- It is a passive, hands-off investment.
- The majority of any bank's profits comes from lending money and mortgages. You as an investor get an opportunity to invest alongside with the Canadian banks.
Just like with any other investment, there are also risks. Those risks, however, can be mitigated by understanding real estate fundamentals, finding an experienced syndicated mortgage agent to work with, and doing your own due diligence in understanding the investment you are about to make. If you would like to learn more about syndicated mortgages, feel free to connect with me.