Canadians often seek stable and reliable investment options in periods of market volatility and rising interest rates.
Maximizing Your Returns: Comparing Private Real Estate Investments and GICs
Canadians often seek stable and reliable investment options in periods of market volatility and rising interest rates. While Guaranteed Investment Certificates (GICs) have traditionally been a popular choice due to their risk-adjusted returns, there's an alternative that not only typically offers higher yields but is also highly tax efficient: Private Real Estate investments in registered funds.
Understanding GICs and Registered Funds
Before diving into the comparison, let's clarify what we mean by these terms.
GICs are investment instruments offered by Canadian financial institutions, providing guaranteed fixed returns over a specified period. They are often favoured for their low risk. GICs can be non-registered or held in registered investment accounts such as TFSAs, RRSPs, or RESPs.
Registered Funds are investment accounts that are given tax-deferred or tax-sheltered status by the government. They allow for tax-efficient investments in various assets, including private real estate. These funds are tailored to optimise returns and minimise tax liabilities.
Comparing Returns: GICs vs. Private Real Estate in Registered Funds
The main takeaway when comparing GICs vs Private Real Estate registered funds: the latter is both tax-efficient, and historically generates higher returns. The result is greater after-tax income.
Let’s take a look at two scenarios:
- Registered Private Real Estate Funds vs. Non-Registered GICs, and
- Registered Private Real Estate Funds vs. Registered GICs
Registered Private Real Estate Funds vs. Non-Registered GICs
If you were to invest in a non-registered GIC and a registered private real estate investment with a similar rate of return, the total return on both investments might appear similar at first glance. However, the tax implications are much different.
Non-registered GICs are fully taxable at your marginal rate. In contrast, income from private real estate investment in registered funds is taxed more favourably as it is designated as tax-deferred or tax-sheltered, leading to significant savings.
So, while the gross income from both investments might be comparable, the net income - what you actually get to keep after taxes - is notably higher in the case of the private real estate fund.
Registered Private Real Estate Funds vs. Registered GICs
If we compare registered GICs and registered private real estate funds, the latter historically offer higher yields. While GICs are guaranteed, you pay a premium as an investor for the reduction in risk – that premium is lower potential returns.
A cursory glance at the best GIC rates as of February 2024 show rates of return coming in below 5.5%. In contrast, below are the targeted annual returns of Registered Funds Eligible Investments on the Parvis platform.
Why This Matters for Canadian Investors
The bottom line is clear: while GICs offer a sense of security and predictability, they may not be the most financially savvy choice for investors looking to maximise their returns. Private Real Estate investments in Registered Funds not only potentially yield higher returns but can also keep more money in your pocket through tax efficiency.
For Canadian investors seeking to optimize their investment portfolio, considering Private Real Estate in Registered Funds as a part of their investment strategy could be a wise decision. However, it's crucial to consult with a financial advisor to understand the suitability of these investments for your individual financial goals and circumstances.
While the allure of traditional investment options like GICs is understandable, exploring tax-efficient alternatives such as Private Real Estate Registered Funds can lead to significantly higher after-tax income. In the world of investing, it's not just about the returns you earn, but also about how much of those returns you get to keep.
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