How to achieve a 50% rate of return in 3 years

In my previous career as a financial advisor and developer of financial planning software, I spent over 15 years devising financial plans and advising clients on how to maximize the return on their investment while trying to minimize their taxes and any risks.

The following simple strategy will demonstrate how an investor could achieve a return of 50% in 3 years without taking on any additional risk.

To implement this strategy we are going to use a Tax Free Savings Account (TFSA), an RRSP account and a Syndicate Mortgage.

To begin the investor would invest \$25,000 into a Syndicate Mortgage project using a TFSA. Everyone is currently allowed to contribute up to \$25,500 into their TFSA if they have not yet done so. The Syndicate Mortgage in this example pays an 8% fixed return over the term of 3 years, which works out to a total return 24%. In addition, at the end of the term if the project were to meet a projected profit target then an additional 12% deferred lender fee would be paid to the investor. This would bring the total return over 3 years to 36%. (24% + 12%)

At an 8% return the Syndicate Mortgage would pay \$2,000 per year in interest into the TFSA. This income is tax free to the investor and therefore each year, the investor would withdraw the \$2,000 and invest it into an RRSP account (assuming that RRSP contribution room was available). If the investor was in a 40% tax bracket, he would save \$800 per year in taxes or \$2,400 for the 3 year term of the investment.

Finally, at the end of the mortgage term, if the Developer achieves the profit target for the project and the additional 12% bonus interest is paid the investor would receive an additional \$3,000. To maximize the investment return the investor would also withdraw these funds from the TFSA and invest it into the RRSP account. This would then produce a tax saving of \$1,200.

So let’s add it all up.

Interest income                      \$ 6,000
Deferred lender fee               \$ 3,000
Tax savings                            \$ 3,600
Total                                       \$12,600

This translates into a 50% return on your investment (\$12,600 / \$25,000)

Since investors in a Syndicate mortgage are registered on title and the mortgage is secured against the property an investor would not have taken any additional risk to increase their returns from 24% to 50%.

In addition, when the capital is invested into the RRSP account the investor can then reinvest the capital into another investment which would boost the overall returns even higher.