Buying Ottawa Real Estate versus Buying an RRSP

Have you ever wondered what the difference would be between buying an investment property and buying an RRSP? Which one would yield you a higher return upon your retirement?

Let’s say you have $50,000 to spend on an investment. Of course, you have many options, but we will discuss two.

Option #1 - RRSP

One option is to buy a $50,000 RRSP. You hold this long-term investment for approximately 15-20 years, at which time you decide to retire. The “rule of 72” for investing purports that an investment will double its value in 7.2 years at 10% interest. If your RRSP earned 10% interest, it would double twice in approximately 14.4 years. Therefore, your original $50,000.00 would have increased to $200,000.00 at the time of your retirement.

If you don’t think your investment will make 10% interest, simply decide which interest rate is reasonable and divide it into 72 to find out how much time it will take to double your money. For example, if you think your investment will return a rate of 8%, divide 8 into 72. Your investment will double in 9 years at that rate of interest.

At the time of your retirement, you decide to use your RRSP as income, which is taxed at your retirement rate of taxation. What do you think your rate of taxation will be at retirement? If you think your rate of taxation will be 30%, your $200,000 nest egg will be worth $140,000. If you think your rate of taxation will be 50%, your $200,000 nest egg will be worth $100,000.

Option #2 – Real Estate Investment Property

Another option is to buy an investment property. Let’s say you find an investment property in the Ottawa area for $200,000. You use your $50,000 as a down payment on your property. You charge enough rent to pay for the mortgage payments, insurance, realty taxes, renovations, and vacancies. The tenants pay all utilities. After approximately 15-20 years, you are ready to retire. The mortgage has now been paid in full. At this point you have two options:

1. The first option is to continue to rent the property and keep the rental profit as monthly income.
2. The second option is to sell the property and use the profit as retirement income.

Let’s say you decide to sell the property for $200,000. The entire $200,000 is tax free, since you did not realize a capital gain on the sale of the property (you bought and sold it for the same price). This example assumes that your property is still worth $200,000. What do you think this property would be worth after 15 or 20 years? Statistics obtained from the Ottawa Real Estate Board show that since 1956, the average increase in value for a property over 15 years was 99.41%.

If you sell the property for higher than you bought it for, you will realize a capital gain and pay tax on the profit. For example, selling the property for $400,000 (this is a realistic amount considering the statistic mentioned earlier) will give you a capital gain of $200,000. Today’s income tax rules charge capital gains tax at your tax rate on 50% of your capital gain. In this scenario, you will be charged tax on $100,000 (50% of $200,000) at your tax rate. Assuming a tax rate of 30-50%, you will pay between $30,000 and $50,000, in income tax. This is not bad considering you have the remaining $350,000 to $370,000 in your pocket!

An important item to consider when evaluating your investment options is how much hands-on involvement you want in your investments. If you like to be involved in your investments and you are a handy person, an investment property may be the right choice for you. If you want to invest in something and not think about it until you retire, then an RRSP may be the right choice for you.

In any case, we always recommend that you speak with an investment professional before deciding on any course of action.

Happy investing!