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Mar 1, 2016

Using Your Rrsp Or Lira To Help Your Children Buy Their First Home

by Gerry Hogenhout

Gerry HogenhoutWhen I bought my first home, at age 23, I remember having a discussion with my parents about whether it was more difficult for my generation to buy our first house compared to their generation. While my parents shared the financial struggles they encountered to purchase their first home, I too had to make many financial sacrifices as well as endure many struggles to accomplish home ownership which, admittedly, was quite an achievement for me at that time in my life.

It didn't matter that my first house was a very small home and that I needed to live in the basement while I rented out the main floor to make the finances work. It also didn't matter that I had to sell my beloved Chevrolet Camaro to fund the down payment and it also didn't matter that I had less than five dollars left in my bank account after getting the dreaded phone call from the lawyer telling me the amount of the certified cheque required on the day of closing. The struggles that I endured didn't matter once I experienced the absolute joy of owning my own home; closing day was a fantastic day that will live in my memory forever.

But, how about today's generation?

Is it easier for today's 20-25 year old young adult to buy their first house, or is it more difficult? Well, I believe it is much more difficult for today's young adult to purchase their first home than at any other time in the past. Today, as we all know, home prices have soared, today's young adult requires a much larger down payment and the qualifications for a conventional mortgage are much more stringent and, aside from trying to save for a down payment, today's young adult must also deal with things like uncertain job prospects, job instability, massive post secondary debt loads as well an ever increasing cost of living. In fact, the odds are so stacked against today's young adults that most of them will never enjoy the wonderful dream and accomplishment of home ownership.

This is an area of great concern for me so much so that I have undertaken to help these young adults accomplish home ownership by creating an investment structure where parents and/or grandparents are able to use their RRSPs/LIRAS (R/L) to help their children and/or grandchildren (C/G) purchase their first home; I call this structure the Child Home Ownership Program (CHOP). The CHOP is structured to utilize your R/L monies, inside of your R/L so that there are no tax withdrawal implications of your R/L, as a method of financing the purchase of a home, either to partially fund the purchase (i.e. 2nd mortgage) or to fully fund the purchase (i.e. 1st mortgage).

With that said, most people do not realize that certain mortgages are actually an eligible investment inside your R/L; it can be a mortgage to a 3rd party (arms length mortgage) or it can be a mortgage to yourself or a family member (non arms length mortgage). So, here's how the CHOP works. Parents and/or grandparents use their R/L to fund, or partially fund, the purchase of a home that, for the time being, will be used as a rental property until such time they wish to gift or sell the home to their C/G. The home is purchased outside of the R/L, possibly within a corporation or trust structure and, during the time it is a rental property, rental income will be collected from a tenant to pay the mortgage payment back into the R/L as well as pay the property taxes and any other expenses outside of the R/L.

As an example, let's say the mortgage is established at 5%, this means the R/L is not only earning 5%, but it is also accumulating the funds used to pay down the mortgage principal (inside the R/L); and while this is happening the home has the potential to increase in value (outside the R/L) and, in a perfect scenario, you may possibly collect net cash flow each month from the net rental income (outside the R/L). While the CHOP provides solid investment returns, the greatest benefit of all is that you have helped your C/G enter the world of home ownership, an absolute wonderful gift that your C/G will never forget and something you and them will cherish forever. This not only makes your investment decision a family affair but this will also create an intergenerational asset as well as a family legacy.

So, when is the best time to consider starting a CHOP?

Well, anytime is a good time but if you happen to start this program upon the birth of your C/G, guess what, when the newborn child is 20-25 years of age, the mortgage will be paid off (not by you but by your tenant). All of us in the financial industry know that the best ingredient for a successful investment plan is “time”, the longer you have for your investment to work, the better the results will be.

Now, here’s another really cool component of the CHOP. Let’s say you started a CHOP when your C/G is born, and let’s say 20-25 years later the home is paid off and your newborn C/G has now become a young adult. In this case you could consider selling the home to your C/G at any price you want (i.e. FMV or below FMV) and you could also consider holding back a new mortgage to facilitate the sale of this home to your C/G; well, guess what, you've now just created a new revenue stream for yourself for the next 20-25 years or for however long it takes your C/G to pay off the mortgage you held back for them to purchase their home. Also, this newly created revenue stream is outside of your R/L and it hasn’t cost you any money to set up.

In closing, we all know the benefits of real estate. Today, tomorrow and for all future years to come, people will need a place to live. With a continually growing population this means there will always be a growing demand for reasonably priced residential housing. Using this knowledge makes real estate a solid and safe investment, especially for your R/L and especially for your C/G. Welcome to CHOP!

Gerry Hogenhout, CPA, CGA, CFP, AMP is the founder of the Child Home Ownership Program (CHOP) and the principal of Hogenhout & Associates Incorporated, an investment company located at 161 Bay Street in downtown Toronto; T. 519-942-0220; email; web

This information outlining CHOP is published for general information purposes only, any action you take upon the information provided is strictly at your own risk; it is highly recommended that you seek professional advice before implementing CHOP.