It’s difficult for me to picture how I will be when this blog post is posted. My son, Bruce, will be a week old and I will be exhausted.
People said getting married, starting a new family, moving and having a new career are the most stressful events in life. It is suggested that you should NOT do more than one of these events in one year. And yet we did all of them in one year!
Like most new parents, we had no idea what to do with the new born. I wasn’t expecting how difficult breastfeeding could be and how exhausting my body would become when taking care of a new born. We didn’t know much about sleep training or white noise machines. We let Robin guide us through the new parenting experience.
As little as I knew about being a first-time parent, I did know a lot about real estate, which meant I could prepare Robin for the future. We bought a house for her when she was 3 months old.
We bought that house for her before we learned about swaddling and the white noise machine – both helped her fell asleep on her own and gave her five to six hours of sleep every night. If these hadn’t worked, it wouldn’t have been a huge issue, as I’d heard about Huckleberry, a great site that helps with sleep training for babies. It definitely is needed for those parents going through multiples stresses at once along with the sleepless nights, and perhaps I may have to use it for my newest son Bruce if the white noise machine is not successful in helping him sleep.
So when our expecting friends asked us how much we would put into the new born’s Registered Education Saving Plan (RESP), we told them we did nothing with the RESP.
Most RESPs in the market invest in mutual funds. We learned from Money Master the Game 7 Steps to Financial Freedom written by Tony Robbins that 96% of mutual funds don’t beat the market.
The majority of RESPs don’t make any financial sense to me.
The options to invest are limited. It is a registered plan and therefore is not allowed to invest in real estate directly.
The biggest return you get from putting money in the RESPs is to get the matching contribution from the government. However, you have to keep in mind that if you children do not go to qualified post secondary schools, the government will take away the grant you get.
And of course, the grant will be taxed at your child’s hands and any return on investment will also be taxed at her hands when the money is taken out.
RESP contributions are not a tax deduction. Since you use after tax money to contribute to the plan, when your child takes out the original contribution to finance their education, no tax is paid on this amount.
This is equivalent to your initial investment on a real estate. When you sell the house, you can take your initial investment out tax free.
Now, back to our decision, we simply want to have this house to finance Robin’s post secondary education. Who knows how much that would be in 18 years?!
All we know is that by the end of 18 years, without refinancing to purchase another property, this house will be mostly paid off.
All we need is to refinance the house, take out a portion of the equity for her education.
If we are lucky enough, there can be some appreciation on the house every year. For 18 years with 3% appreciation, this house can be worth $211K more than what it is worth today.
This house will also help her to fund her first house on her own. With detached Toronto houses worth over $1million today, it will be extremely difficult for the next generation to own a home by themselves.
You have start when they are young! 3 months old seems to be a perfect age to start.
So my friend’s argument is that she doesn’t have enough money to buy a house today. I do agree, if you don’t have a sufficient down payment, putting aside the minimum amount to get the maximum match pay from the government is a great start.
Any savings are better than no savings at all. Tony Robbins’ book can attest to this!
Just make sure you are putting the money into the right type of RESP account, one that allows you to invest in the index funds, rather than regular mutual funds that charge you an astronomical amount of fees.
Until next time, happy real estate investing.
Cherry Chan, CPA, CA
The real estate accountant
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.