Should you invest in your kids' RESPs or buy an investment property?
I had a discussion with a client who is contemplating putting money into RESPs for their two kids or buying an investment property. Here's what I told them: In order to receive the government’s 20% grant, the annual contribution per child is $2,500, so that's $5,000 a year for the two kids. Over the lifetime of the RESP program, the maximum allowable contribution is $50,000 per child, which is $100,000. Look at it this way. If you are pulling $100,000 out of your home equity, whether it's a line of credit or an equity take out by increasing your mortgage which is equivalent to $425 a month (HELOC or mortgage payment).
That's the same as paying for two kids’ RESPs: If you do $2,500 per child times two kids, $5,000 per year divided by 12 months, that's about $410 a month which is close to the $425 monthly mortgage payment if you pull equity out to buy an investment property. Here's the beauty of real estate: At 4% appreciation with mortgage pay down, without lump sum payments or no increased payments, just strictly 4% annual appreciation, in five years timeframe that equity position would double. That’s right, the $100k is almost $200k!
If you look at the big picture, in five years their equity position has increased by $100k because they repay the original $100k and now they have an additional $100k which is equivalent to the total allowable contribution over the lifetime of RESPs for both kids. This can be achieved in five years timeframe!
Imagine if they held onto this investment property for 10 or 15 years, there will be more than enough money to cover the cost of undergraduate and graduate school, well maybe not Harvard or MIT, but there'll be more than enough money to pay for the kids' universities.
The main point here is what’s the best return on the investment money. If parents are investing $400 per month, is the best return achieved through RESPs or buying an investment property?
If you're thinking of investing in real estate, please feel free to reach out. I'd be more than happy to share with you my real estate investment strategies that have worked well for me since 2006.
Happy investing!