Everyone has a brother, cousin or uncle who says he makes 8%, 10%, or even 12% interest on his money by lending it out on Mortgages.
Or maybe you’ve heard about syndicated mortgage deals earning very high returns.
Are these high returns a myth or reality?
Well, just like your friends coming back from a weekend in Vegas, you only hear about the winners.
Private Lending Risk vs. Reward
Private lending is a great investment when done correctly. You can earn double digit returns and when invested from your registered account either on a tax-free or tax-deferred basis.
Best of all, with private lending you have control over who and what you lend on.
Is it possible to earn 12%? Yes. But it’s all about your risk tolerance.
I have investors lending out their money at 4% on 1st mortgages with low Loan-To-Value (LTV), and others taking 3rd position and earning over 12%.
Free Markets Determine Returns
The private lending world is a great example of a free capital market. The more capital available the lower the return. The less capital the higher the return, simple economics.
What does that mean?
Basically the more specialized in lending you can become, the less competing lenders you have and the higher returns.
How Do You Start?
To begin private mortgage lending, you need to decide if you are lending Registered funds (e.g. RRSPs, RRIFs, TFSAs, etc), Non Registered funds (cash, secured credit lines) or both
Each has it’s pros and cons, and each province also has different rules, laws and regulations.
It’s important to completely understand these prior to lending.
A great way to start is to find an experienced mortgage broker and lawyer.
It’s important that you do not lend your money via a mortgage broker or Lawyer that does not themselves lend their own funds. They need to understand this whole concept and the procedures.
The next question to ask when they bring you a deal is,
“Why are you not lending on this deal?”
Many times a broker will have some of their funds in the deal, or if they don’t, it’s because they already have all their money lent out.
Select Property Types
So you have a mortgage broker, a lawyer and cash in the bank now what?
The next step is to select the type(s) of property you will lend on. Ask yourself the following questions…
Do you have a property preference? (e.g. single family homes in urban or sub-urban areas)
Are there any property types that you will not lend on? (e.g. commercial, environmental issues, mobile homes, rural homes, etc.)
Don’t be afraid to fall back on your core knowledge to help you in the real estate world.
Determine Your Tolerance For Risk
It’s important that you ask yourself the following questions, and answer them truthfully. Many people think they are high-risk takers, when in fact they are not.
- What is your risk tolerance?
- Will you lend money on a 1st mortgage, 2nd, or 3rd?
- Can you afford to lose this money?
- What happens if you lose it?
- What is the maximum 1st mortgage after which you will lend money on a 2nd mortgage?
- Can you establish a reserve fund?
Determine Property Value
- Property value is the key security for mortgage investments. So it’s imperative that you learn how to read and understand appraisals.
Most sophisticated lenders not only hire an appraiser to determine the property value, they also get a 2nd opinion from a local realtor on EVERY deal.
Remember, if the borrower defaults, selling the property is your only real recourse to collect your money. So it pays to do some extra research up front to reduce the chance of that happening.
Patience Is Key
Private lending is a great alternative investment to the traditional stock market. It is one of the few investments that you can do via registered funds that gives you direct control over your risk and return.
Many new investors often ask me,
“If you had one piece of advice on private lending, what would it be?”
My response is always take your time and don’t rush. Wait for the right deal and it will come.
Private lending, when done correctly, is one of the best investments available in my opinion.
I would love to hear what you think about this topic!
Comment below, or email me [email protected]