Investing in RESP vs. Rental Property: Planning for the Long-Term

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Education – RESPs or Real Estate

When it comes to securing your family’s future and planning for your children’s education, the decision between investing in a Registered Education Savings Plan (RESP) and acquiring a rental property is a crucial one.

Both avenues offer distinct advantages, but it’s essential to analyze the numbers to determine which option aligns best with your financial goals.

The RESP Route

Let’s take a closer look at the RESP route. Suppose your child is currently three years old, and you aim to optimize their RESP investment.

To maximize government grants of 20% up to $7,200 per child over the RESP’s lifetime, you would need to save $2,500 annually for 15 years.

Assuming an average annual return of 8%, your child would have approximately $81,000 available for their tuition needs by the time they reach college age.

However, this amount might still fall short of covering projected education costs.

The Rental Route

On the other hand, consider investing in a rental property. Imagine purchasing a condominium for $391,100, capable of generating $2,020 in monthly rent. Over a 15-year period, assuming stable market conditions (despite potential fluctuations in interest and rental rates), your investment could yield substantial returns.

After 15 years of prudent management and assuming you can cover the operating costs of approximately $400 per month, the wealth accumulation potential from your rental property can significantly outweigh the returns from a maximized RESP.

The rental route:

But what if you chose to purchase a condo for $391,100 that can earn $2020 in monthly rent?

Purchase Price

$391,100

Down Payment

$78,220

Closing Costs (1%)

$3,911

Land Transfer Tax

$4,367

Total Cash Required

$86,498

Cashflow Projections 

Expenses

Monthly Cost

Mortgage

$1,849

Condo Fees

$343

Property Taxes

$258

TOTAL EXPENSES

$2,450

RENTAL INCOME

$2,020

CASH FLOW

-$430

Look what happens after 15 years…

Property Appreciation Gain of 2%

$136,851

Principal Pay Down

$74,867

Negative Cash Flow

-$77,400

Gross Net Worth Increase

$134,318

Of course, a lot can happen in 15 years (changing interest and rental rates).

Making the Big Decision

While both RESP investments and rental properties offer opportunities for long-term financial growth, it’s crucial to consider various factors before making a decision.

Evaluate your risk tolerance, financial stability, and long-term goals. Additionally, consider potential market fluctuations and the management responsibilities associated with owning rental properties.

Ultimately, the decision between RESP and rental property investments requires careful consideration and financial planning. By analyzing the numbers and understanding the long-term implications of each option, you can make an informed decision that aligns with your family’s future aspirations.

Remember, the numbers never lie, and strategic investment decisions can pave the way for long-term financial success.

Conclusions and Further Thoughts

Contact Huber Mortgage to talk through your options!    Over 50% of my clients are self-employed! Contact HERE.

Sincerely,

Michael

PS – One of my hobbies is blogging about mortgages, debt and government policy.  During the day I’m a MORTGAGE BROKER in Kelowna, BC!

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