Should I invest in RRSP or Real Estate?

Today’s blog will examine the difference between RRSPs and Real Estate and which one is better. We will also explain asset classes, investment growth and the investment possibilities.
RRSP stands for Registered Retirement Savings Plan. In the US, they are known as the IRA. They hold investments that help reduce taxable income and grow tax-deferred. Real estate is a fixed asset that can be traded.

To start, let us look at the definition of asset allocation. There are different parts, cash, bonds, stocks, equities, and real estate or alternative asset allocations. Each one of them has a performance and earns an investment. An RRSP account is like a big bucket, which can hold whatever you put inside it. And you can have cash, which is your savings accounts or hard cash. There are also liquid assets that you can use to buy things. It also contains a fixed income or lending, which means you can lend money as bonds or fixed deposits. We also have another asset class: equity and ownership in businesses.

Alternative asset classes are usually sometimes divided into real estate and commodities. These can come in stocks, mutual funds, segregated funds, index funds or ETFs, also known as exchange-traded funds. You cannot hold alternative asset classes such as real estate, commodities or REITs, which are real estate investment trusts, or commodities such as gold, silver or cryptocurrencies. The only three things you can have in your RRSP account are cash, fixed income, or equity. Many people have an RRSP but don’t know what’s inside their RRSP. If you see cash, this is how the growth has been performing in history.

Cash will not give you any return if you do not invest it. For example, if you put $100 in a shoebox and leave it there for ten years, and in 10 years, you’ll still have $100 when you open it again, there is no return on that cash. Then you have equity, and equity can go from low risk to higher risk, and obviously, the return will fluctuate. So equity will give you a better return than fixed income. The alternative is real estate and commodities, which will provide the highest return. But over time, the higher the return, the greater the risk. RRSPs can only contain cash, fixed income, or equities.

When I’m reviewing accounts and conducting analysis for clients, they don’t realise that they have it in cash or fixed income, which yields a small return. I would suggest to clients that they should be invested in equities taking into account their age and risk tolerance. This is how you can achieve a higher return with RRSPs. I have drawn up a comparison chart which compares RRSP to real estate. If you’re going to compare the two of them, this is how I would compare them as leverage. And if you see the RRSP says no, this means that if you save $50 monthly,  as you only have $50, and $50 is going to grow according to what you have put inside your RRSP, which could be cash, fixed income, asset allocation or equities. With real estate, you can leverage what it means. If you have a down payment, you can buy a $500,000 house with a deposit; you don’t need to come up with the total amount. It grows tax-deferred with your RRSP. With liquidity, you can access that cash immediately with your RRSP. If you own an investment property, you will pay capital gains.

In this one, I want to give you a little bit of a difference here because the RRSP, let’s say that you are growing your money, you get to find that you accumulate $500,000. What will happen when you start your retirement or start withdrawing from your RRSP in your RRSP? You’re not going to take the entire amount out. You’re going to take the amount you need for that year, and therefore that’s the only tax you will pay. Let’s say that you take $20,000. In the year, you will be taxed on $20,000, and the remaining of it will still grow a little bit. Then when you take another $20,000, They will tax you on that.

However, when you are selling a property, and it’s your principal residence, you don’t have to worry about any tax implications. If you are selling an investment property, the difference between the purchase price and the sale price will be liable for capital gains tax. If you have an RRSP, you can start with $50 a month; with real estate, not so much. You need a minimum down payment put together, and in some cases, depending on where you are, it’s pretty significant, so it’s not going to be $50 a month. So it seems it’s harder to get it. With an RRSP, when you select the funds you want to invest, the money goes in, and you don’t have to do anything else.  You need to take care of maintenance with real estate, especially with an investment property.

So to answer the question, RRSPs or real estate, I will advise that you consider both depending on your personal situation. If you don’t have enough money to buy a property, get started with an RRSP.  If you now have the down payment or are ready to purchase real estate, go for it.  Remember, the two of them have different properties, and they will serve you well within a well-diversified portfolio. So I hope this has helped explain the difference between the two. If you require help in evaluating your RRSP, please contact me, and we can arrange a private call. Until next time.   

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