Often times when investors are considering private mortgage lending, they hesitate to get started due to a lack of defined strategy or focus are for placing private real estate loans and mortgages.
While there are a number of different strategies or approaches an investor or lender can take, I tend to recommend the most basic approach when getting started and that’s to focus on what you know.
This may sound too obvious or too simple, but when you think about it, most people will tend to gravitate towards what they know, regardless of what it is that they are working on.
Recently I got a call from an investor who wanted to start putting money into private mortgages and he was himself a developer.
When we started talking about what types of deals he should be looking at, the conversation quickly came around to development because that’s where is knowledge and expertise lied, and that’s what he was most comfortable assessing.
Almost any investor has a knowledge and experience base to draw from that can relate to a private mortgage niche.
In the event that no true slice of the market can be identified, then the best starting point is to simply invest in residential home mortgages because at the end of the day, all investors with funds available for private mortgage financing will have experience with home ownership.
Residential real estate is the easiest type of private mortgage to assess and there are more opportunities to consider compared to all other private real estate lending opportunities combined.
So the sticking what you know private lending strategy is a great place to start, and for many investors, the only type of lending opportunity they end up considering over time.
If you’d like to know more about potential private mortgage lending strategies you can take as an investor, please give me a call to discuss further.
Click Here To Speak Directly To Toronto Mortgage Broker Joe Walsh
Today we’re going to discuss some of the concerns I hear most often from investors that are considering investing in private mortgages.
These are individuals that typically are heavily invested in the stock market and are looking to diversify their portfolio via private mortgages, but are unsure of the related risks, which becomes a barrier for them moving forward with mortgage investment opportunities.
For the benefit of anyone that is considering private mortgage investing, I came up with the most common concerns I hear and will now go over them.
Investors can have a hard time rapping their head around how providing a private mortgage to someone with bruised or poor financial and credit profile could be a good investment opportunity.
Well the fact of the matter is that a private lender provides mortgage financing in the same manner that an institutional lender does and has the same legal recourse available to protect themselves against loss in the event of borrower default.
On top of that, you’re still actively doing risk management, assessing risk, and determining which scenarios fit your lending criteria because there are lots of scenarios where people can require a private mortgage without bringing high levels of lender risk to the table.
As banks get tighter and tighter with their lending criteria, there are more and more deals that fall to private lenders. And not only are more deals available, but many of these previously bank grade deals are very appealing with respect to risk assessment and risk management.
The second most common investor concern is how do I go about maintaining and administrating a private mortgage.
Individual investors don’t typically have a staff or admin pool to draw from unlike a bank or institutional lender, so key barrier to private investing is the concern over how to cover off mortgage administration requirements.
In reality, a private mortgage typically has very little administration that is not hard to cover off. The term is usually one year, and the borrower provides 12 postdated cheques for the monthly interest only payments. The time required to administer most private real estate loans is really quite minimal and should not be viewed as a borrowing deterrent.
There is always the possibility that a default can occur and there can be a big fear of capital loss which once again stops an investor from moving forward with a private mortgage opportunity.
This is where we come back to risk assessment and entering into a mortgage where capital conservation has been properly considered from the get go.
When a default occurs that the borrower does not immediately rectify, we turn the process over to a lawyer to manage the power of sale process if necessary to get all your capital and accrued interest paid back to you.
Regardless of the amount of time it takes to deal with a default, capital is conserved by the risk assessment and risk management process conducted before funds were ever advanced.
If you need more information on private mortgage investing, I suggest that you give me a call so we can discuss any concerns you may have and determine what lending parameters best fit the level of risk you are prepared to take.
Today we are going to talk about the conservation of capital in private mortgage lending.
In order to better understand this concept, let’s do a bit of a comparison to the stock market.
Because a lot of investor capital is in the stock market, this can be a good way to better understand how mortgages can promote capital conservation.
So lets get into an example.
In a mortgage you’re taking a snap shot in time of the mortgage investment and the property value. The mortgage is advanced as a percentage of the property value to protect the investor from risk of loss.
When you look at stock investment, the stock value will go up and down while with a mortgage, the value pretty much stays the same as well as the value of the property.
Most of the mortgages we place are for a one year term, so you’re not going to see a big change in the real estate value over a 12 month period.
During that year, the amount you invested stays the same, and the amount you earn is known from the outset.
With a stock, you certainly have the opportunity for large stock appreciation, but you also have the alternative to potentially contend with as well.
A mortgage provides a fixed rate of return, but a fair rate that is acceptable to the investor.
And unlike a stock, you know when you’re going to get your capital back. At the end of the mortgage term, you can get paid out or renew the mortgage. There is an exit strategy to get your capital back at a specific point in time.
So with a mortgage, the risk is very low and you know what your return is going to be.
With a stock, you are at the mercy of the market and must be prepared to ride the up and down swings that can occur in the market.
The investor risk of any private mortgage is managed through the valuation of the property relative to the mortgage amount being extended, and the strength of the borrower’s ability to repay.
If there are repayment challenges, we have the ability to work through them and recover capital and earnings through the rights that are afforded to all mortgage holders.
This is where the conservation of capital comes in both through the process for getting the mortgage in place, and the security its back by.
These and other reasons are causing more investor dollars to find their way into private mortgages both for residential and commercial properties, in first mortgage, second mortgage, and even third mortgage positions.
With private mortgages, the goal is to generate a fair return while minimizing the risk of capital loss which offers a significant advantage over the stock market if capital conservation is important to your investing strategy.
To find out more about private mortgage investing, give me a call and I’ll make sure you get all your questions answered right away.
For many years, the bulk of private mortgage lending was concentrated into second mortgages where the private lender was going behind a bank or institutional first mortgage.
The rationale for this type of lending was that 1) there was lots of demand in the market; 2) because the mortgage was going to be in second position and carrying a higher risk, a higher rate of interest could also be charged, providing a good rate of return, and 3) the amounts for most second mortgages were relatively small, allowing the investor to develop a well diversified mortgage portfolio without having a large amount of cash to work with.
Second mortgage lending remains very popular in Canada as housing prices continue to hold for the most part and consumer debt still sits at very high levels where refinancing or consolidating debts into a second mortgage to leverage available equity is a common cash flow management and debt management strategy.
But since 2008 when the last great recession hit, there has been an ever growing supply of private first mortgage opportunities, mostly on the commercial property side.
With banks tightening up on lending requirements, there is a large supply of product or financing requests on the market at any given time that require private mortgage financing, or more accurately are forced into private mortgage options.
This has not only attracted individual investors and investor groups, but those that have more substantial cash holdings for mortgage investing.
The commercial private firsts that are available are, on average, significantly larger than the average residential private second mortgage, so placing this type of loan requires considerably more capital resources.
In addition to being able to fund bigger deals that are lower risk that perhaps what we’ve seen in the past, more investors have entered into private lending to more easily diversity their multi million dollar portfolios.
The rate of return on a private first for the most part is going to be higher than a private 2nd, but not necessarily depending on the time to get in place, the property type, and the geographic location.
First mortgages also provide the deal control many investors require with first mortgage position versus being in second spot behind a large institutional lender.
The main benefit of these develops is the establishment of a sub prime market for commercial property in the $500,000 to $3,000,000 range.
Near bank deals can also be highly sought after by private investors, creating competitive pressure on pricing and terms to secure deals.
In fact, in certain strong market areas such as the Greater Toronto Area, private first mortgages can be priced only slightly higher than similar institutional deals allowing them to be considered as a short term funding option even over a bank deal if the circumstances and timing warrant.
The bottom line here is that there are many different ways to operate in today’s market as a private mortgage investor, largely driven by the contraction and selectivity of institutional lenders on commercial property deals.
If you would like to explore commercial first mortgage lending and investing opportunities with private funds, I suggest that you give me a call and we can go over both your lending and funding criteria as well as potential deals you many be interested in that are currently available.
Click Here To Speak With Toronto Mortgage Broker Joe Walsh
As a private mortgage broker, I am constantly getting calls from both consumers and business owners to locate and secure private funds for different applications.
The amounts we place range from $30,000 to several million dollars and placements can be in first, second, or even third position.
Even though we deal with a large number of private investors and lenders, every lender has their own lending and funding requirements and every lender, for the most part, is in and out of the market in terms of having funds to deploy.
So there is always opportunity to invest.
The key is matching the funding request with the lender requirements and criteria. This is where me and my team come in.
We work hard at understanding the needs of all our lenders that wish to place their investment funds into private mortgages so that when the opportunities arise, we can quickly place the deal with the most relevant options available.
There are many investors that only focus on private second mortgages up to $100,000, others that focus on residential construction, and still others that are more interested in the larger commercial deals.
The bottom line is there is such a wide range of borrower demand its very likely we will have private mortgage investment opportunities that you may be interested in from time to time.
If you are new to private lending, this is a growing market space as banks and institutional lenders and federal regulators continue to tighten up on mortgage financing rules, pushing more and more deals, good deals, into the private lending space.
Because we work in the Ontario market where real estate is typically very strong, there is also a large interest in providing private loans due to the strength in the security.
Most mortgages that we place are for a period of one year. Terms can be longer depending on the lender or investor’s comfort in the deal and investing criteria.
Private investing is one of the easiest investment portfolios to get into due to the limited amount of knowledge required to invest and the minimal amount of regulation related to it.
If you would like to inquiry about private mortgage investment opportunities we are working on now, or in the future, then I suggest you give me a call at 416 464 4113 and we can set up a time to either speak on the phone or meet in person.
First of all, when we speak of a private mortgage investor or a private mortgage lender, in most cases they are one in the same.
The only times when you could potentially draw a separation between them is when you are referring to something like a mortgage investment corporation where the corporation looks after investor funds and places those funds into private mortgages.
In that context, the mortgage investment corporation or MIC would be the private mortgage lender and the individuals providing funds for lending would be the private investors.
In almost all other cases, the lender and investor are the same.
So regardless of how we refer to it, the question remains the same…how does one get into the business of private mortgage investing/lending?
The answer to this has a few different layers and we will now explore.
First, from a regulatory point of view, there is no securities laws or special investment governance that is required to place a private mortgage. You don’t have to take a course or become qualified in any particular manner.
Second, the level of knowledge required to start investing in private mortgages is minimal as compared to any other type of investing. This type of investment vehicle is very straight forward to understand. And while it is always a good idea to consider the counsel of experts such as lawyers, brokers, real estate agents, accountants, and so on, you certainly don’t have to when making a decision to invest or not.
Third, there is no minimum cash requirement for investing in private mortgages. You can use cash or leveraged funds if you so choose.
The only real requirements that exist to become an investor in private lending situations is to 1) have money to lend or invest; and 2) be able to access the market for potential borrowers that meet your lending/funding criteria.
Now there can be a lot more that goes into being a successful private investor as with any type of investment vehicle, there is risk involved and losses can be incurred if risk is not properly managed.
But that is really a different discussion to get into as the focus of this article is how to become a private money investor in the mortgage market.
The most common method for investing in mortgages is through recruiting the right team of experts to support you.
The majority of private lenders work with mortgage brokers to source and administer deals, and with a lawyer to close and fund the deals as well as act on behalf of the investor if there are any legal issues that arise related to mortgages placed.
Selecting the right broker and lawyer will get you well on your way to becoming an active and successful private mortgage investor.
The key is in selecting individuals that have experience and a track record of successfully managing their client’s requirements.
If you would like to learn more about our private mortgage investing services for the private investors we work with, please give me a call and we’ll set up a time for a phone call or face to face meeting that works for both of us.