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.
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel