Opting to be a private lender is a big decision. This new investment strategy may represent an entirely new direction and uncharted territory when compared to more traditional forms of investment. This is both exciting and can be daunting in regards to just how to invest your funds for the maximum investment return while ensuring the safest method of investing.

 

The unlocked potential of a TFSA to lend out your money towards mortgage loans

Look no further than your Tax-Free Savings Account (TFSA). A TFSA is a fabulous investment platform. A friend to private lenders, your TFSA will enable you to take out as much or as little as you want and the interest earnings on your mortgage loan will not be taxed. You can draw from the potentially lucrative interest return on your private mortgage loan worry-free. In other words, you will not face a financial penalty or have the taxman breathing down your neck with the tax-free savings account. 

The TFSA is really an investment account because it is registered. This means that you can hold various investments in it such as GIC’s, mutual funds, bonds, and even real estate within your TFSA.  If you were to withdraw money from another account including an RRSP, RRSP, RIF, or Lira then you would be taxed on the amount you withdraw. 

All that is required to open your TFSA is that you demonstrate that you are a Canadian citizen, over 18 and have a valid Social Insurance Number (SIN). Keep in mind that there is a maximum contribution allowance per year set by the Canadian Government. As of this year, the maximum contribution limit is Six Thousand dollars per year. However, if you have not contributed to a TFSA before then your first-time contribution can be up to 69,500 for an individual and for a couple, 139,000. After each new tax year, you can contribute up to 6,000 dollars moving forward.

This freedom to determine the amount you want to withdraw, in addition to allowing for the interest earnings to be deposited in your TFSA, makes this investment a vehicle to go the distance and help you to navigate the investment journey. 

 

Your Tax-Free Savings and the Rule of 72

Beyond the obvious advantages of tax-free withdrawal and not having to fear hefty penalties, using a TFSA to privately lend out your hard-earned money will also leap you forward in terms of the potential for compound interest on your investments and specifically  The term that is thrown around and you may have heard in passing relating to the advantage of compounding interest is dubbed The Rule of 72.

Simply put, the Rule of 72 is a logical way to mathematically estimate the doubling of a particular investment’s value. The equation is very simple. Take 72 and divide it by the rate of interest to determine the time it will take to double our investment.

If we take the hypothetical interest rate of twenty percent interest (we know this is a very high-interest rate but we will explain that by privately lending out money from your TFSA towards certain mortgage loans you can reasonably charge twenty percent interest) and divide it into seventy-two we will see the exact number of years it would take to double our investment money.

 

72/ 20= 3.6

 

In this equation, it will take roughly 3 and ½ years to double your money in your TFSA if privately lending out at twenty percent interest.

 

Privately lending and your TFSA- the perfect marriage

So what is the relationship between money you have invested in a TFSA and private lending for real estate? It is simple and potentially lucrative. When you have money invested in an investment vehicle you are earning interest on that money. Usually, your rate of return will be at around four percent per annum.

Even if your RRSP is supposed to earn a rate of seven or eight percent, the bank will be taking up to three percent of your investment return in bank fees and commissions. Furthermore, if you were to decide to take money from your RRSP and lend it out privately towards let’s say the first mortgage on a property, you will be taxed on your withdrawal.

However, if you take this same money and invest it in a TFSA you can use this money ( without tax penalty) to lend out to a third party privately on a mortgage loan. Not only will you be earning interest on the loan you have taken temporarily out of your TFSA but you will also be able to set that interest rate at a very high level to maximize the advantages of your TFSA investment money. There are different mortgage options that you can look at including a first, second, or third mortgage on a given property. 

In the case of trying to maximize the tax-free advantage of your TFSA, it would be advisable to look for a borrower interested in a third mortgage so you are in a position to charge a very high-interest rate on this loan. Yes, twenty percent would be more than acceptable to charge on a high-risk third mortgage.

Furthermore, if you were to lend out a certain amount of money from your TFSA at twenty percent for a one year period, not only would you be able to put back the money that you loan out plus interest, you will also be able to add an additional six thousand at the start of the new tax year to maximize the total allowance of your yearly TFSA limit.

If you were to loan out money towards a third mortgage again over the next two years, just as we had calculated in the Rule of 72, in addition to adding your yearly allowance of six thousand, you will have doubled your TFSA investment in just three years due to compounding interest.

 

Maximize the potential of your TFSA- the ball is in your court

No brainer? Well, the potential is certainly there to maximize the distinct advantages of your TFSA if you were to invest privately in higher-risk mortgage loans. If you were to do this from any other investment platform, the tax penalties would make a less than lucrative investment option.

Tax-free withdrawal, if used to your advantage, is a very important perk. The trick to taking true advantage of the TFSA and using the Rule of 72, is to look for investment opportunities that allow you to charge your own interest rate, avoid bank commissions and penalties and maximize the earning potential of your investments. By privately lending out your TFSA savings, you have the potential of doubling your investment in a very short time period. 

There may be those that don’t feel comfortable with this route. This is for you to decide. We have given you an inside look into how to steer your investments towards doubling in value. The ball is in your court to just how much you will choose to maximize the advantages of your TFSA moving forward.

If you would like more information on private lending, you can check out our blog post here.

If you would like to speak with one of our brokers on private lending options, you can book an appointment here.