Because, hey, who should be a better credit risk than yourself? (Immediately defaults)
Here at the ol’ FU machine, we’re all about giving you kids some of the most unusual investing ideas out there. I’ve outlined everything from putting your cash to work lending dirtbags money to buying a storage locker business. And that’s just in the last month. I’ve come up with more odd investment ideas in the past six months than most people do in their lifetimes.
There’s a reason why I do this. Most investment bloggers (and, hell, personal finance bloggers too) do nothing but chronicle their very predictable actions. There’s very little to gain by retracing the beaten path. The real opportunities are in the bushes where nobody is looking. Probably because there are snakes. Or spiders.
At first glance, you may not realize the benefits of something like giving yourself a loan. Why would such a thing be beneficial? You’re literally just taking money from one pocket, charging yourself interest, and then putting less of it back in the other pocket. It seems like action for the sake of action.
But there are actually two very interesting reasons why you’d want to give yourself a loan. Let’s look at each of them.
Starting a company
Every company needs a certain amount of start-up capital.
Most people fund their companies in a very predictable way. They use their own savings as initial capital.
Say you bought a fast food joint for $200,000 and immediately incorporate the thing as its own business. You decide to put in $50,000 of your own money into the company as shareholders equity and lend the corporation the other $150,000.
Most people lend their corporation money interest free because they want the business to succeed. The business then pays back the loan as it can afford it.
But there’s no rule that indicates this loan has to be interest free. In fact you can, in theory, charge yourself all sorts of interest. As long as it’s considered to be the going rate, you’re good to go.
What most people do is research a little and see the rate a bank would charge them to do the same loan. If a bank would charge 6% in a similar situation, you could easily charge your corporation the same amount.
Remember that you’ll have to make this a legit loan. Paperwork will need to be done and the corporation would have to make the designated payments. You can’t just give yourself a loan and have the terms be “I’ll pay back whatever whenever I want.” Do you really want to make your accountant cry?
Give yourself a mortgage
This one is a little more complicated, but it can be lucrative for a very small percentage of the population. It turns out it’s possible to hold your mortgage in your RRSP.
It works something like this. There are all sorts of different investments you can put in your RRSP. It’s not just stocks, bonds, or ETFs, either. It turns out you can totally invest in certain qualified mortgages inside of your RRSP. This is how those private mortgage companies can get away with saying they’re RRSP eligible.
Even though I’m in the private mortgage business I’ve never examined the possibility of holding them inside my RRSP. As far as I can tell they need to be first mortgages only, and they need to be insured by one of the various agencies that do this.
It’s less complicated to hold your own mortgage inside your RRSP, although it’s certainly not easy. Here’s how it works.
- You pay someone to set up the deal for you. Only certain financial institutions will do so and you’ll have to pay CMHC insurance fees.
- You have to make sure that you have enough contribution room to pay for the whole house, not just the part mortgaged.
- The interest rate you give yourself must be competitive with comparable mortgages. I’m thinking you’d pretty much be locked into giving yourself a loan at 4.64% which is sure better than a GIC but could easily be beaten by stocks.
I’ve pretty much only touched on the basics. There are a number of companies that will do this for you. Do some Googling and talk to one of them before you get started. I’m not getting too involved in this because, frankly, I think it’s kind of dumb.
This is the end
It’s not that hard to give yourself a loan if you’ve got a corporation. There are a number of advantages for self-employed people to incorporate, as I outlined in this post. Getting a little interest from your own corporation is another, but you could argue that doing so is just shuffling money from one pocket to the other.
Ultimately, I won’t spend much time doing this, but it could very well make sense in certain situations. Your accountant can probably help out with this more than I can.