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Be the banker the banker


									                                                                            Private mortgages are usually arranged between a single investor and
                                                                            borrower (pooled investments are possible but less common) and
                                                                            facilitated by a mortgage broker. Borrowers usually use the cash as
                                                                            bridge financing to buy time to get their credit or finances in order to
                                                                            qualify with a traditional bank or to realize capital on another asset.

                                                                            Unlike bank mortgages, lenders receive monthly payments consisting
                                                                            of interest only until the mortgage term matures, usually in one to
                                                                            two years. On maturity, the agreement is renegotiated or
                                                                            terminated, and the principal is repaid in full.

                                                                            Investors typically receive interest rates of 9% to 11% on first
                                                                            mortgages, and 12% to 15% on second mortgages. So, if you loaned
                                                                            $100,000 to a borrower at the agreed-upon interest rate of 12% for a
                                                                            one-year term, you would receive 1% a month, or $1,000 per month,
                                                                            for the next year. And because the mortgaged property is used as
                                                                            collateral for the loan, if the borrower defaults, you can recoup your
                                                                            investment by putting the property under power of sale.

                                                                            Private mortgages are ideal for investors who want "full control over
                                                                            what they're investing in," says Anthony Fritz, an Ottawa-based
                                                                            mortgage broker. They offer predictable income that's less tha
                                                                            susceptible to equity-market volatility. And with short terms, you can
                                                                            get your money back quickly. In addition, most private mortgages are
                                                                            also RRSP-eligible investments.
 November 2008 of Profit Magazine
                                                                            Peter Merrick, a certified financial planner and president of Toronto-
                                                                            based, agrees it's a worthwhile investment to
                                                                            consider. "It's tangible, and you have the security [of being able to
                                                                            take over the property] in a worst-case scenario."
Be the banker                                                                                                                                    estat
                                                                            Still, it's a vehicle best suited to investors with significant real estate
Susanne Ruder
                                                                            and financial experience. "There are two levels of risk," says Fritz.
                                                                            "One is the borrower defaulting, and the other is not realizing all of
David St Amour is taking control over his personal investments. His         your value upon liquidation of the property."
angle? Real estate. Specifically, investing in private mortgages. Over
the past five years, the 63-year-old president of Sealyam
                                                                            To mitigate the downside and find quality deals, you'll need to work
International Inc., an Ottawa-based firm that facilitates and finances
                                                                            with experienced mortgage brokers. A good place to start is to ask
corporate mergers and acquisitions, has invested at least 70% of his
                                                                            your real estate lawyer for referrals. But be sure to do your
personal investment portfolio in lending money to individuals who
                                                                            homework before committing to any broker. Find out how long
can't (or won't) qualify for traditional bank mortgages. "Absolutely,
                                                                            they've been in business and what their level of education is. Ask
it's a good investment," he says. "I'm much more comfortable in
                                                                            how many private mortgages they place each year and what level of
mortgages than I would be in any equity, any future, anything."
                                                                            support you can expect after funding.

With the U.S. sub-prime mortgage crisis spawning events that
                                                                            A good broker will provide meticulous due diligence on both the
threaten to topple global institutional lenders, investing in private
                                                                            borrower and the property before presenting you with an investment
mortgages might seem counterintuitive. But if you have surplus
                                                                            opportunity to consider. They'll review property appraisals, structure
                               estate                           low-risk
capital and financial and real-estate smarts, it's a relatively low
                                                                            an effective mortgage agreement and exit strategy. They'll also weigh
strategy that offers stable, consistent returns, control ove your
                                                                            current and expected housing values and help build in safeguards,
investments and shelter from volatile equity markets.
                                                                            such as an appropriate loan-to-value amount that doesn't exceed
                                                                            80% (and is often much lower). Some will provide support and
Private mortgages are an "embryonic" business in Canada and not             administration if a borrower defaults. "If the homework is done and
something that's talked about a lot. "But in today's climate, it's a very   everything is done properly, in my opinion it's one of the safest
good opportunity, contrary to what people think," says St  Steven Lee,                                                                     priv
                                                                            investments out there," says Fritz. "We've funded over 1,000 private
managing partner at Markham, Ont.-based mortgage brokerage                  mortgage deals, and less than 10 went to power of sale."
Verico Newbridge Mortgage Inc. With banks pulling back on credit
approval over the last year, "it's opening up more choices in
                                                                            First-mortgage deals range from $100,000 to $300,000, while second
inventory for the private investor, and now they're able to cherry-
                                                                            mortgages are usually for $20,000 to $25,000. Lee suggests that
                                                                            novice investors start small. "It takes time to understand how the
                                                                            whole process works."

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