Accredited Investors Guide to Investing in Mortgages

Being a hands-on landlord does not seem too enticing as it demands more work, time, and effort before it becomes a passive income source. If you are a high-net-worth investor or UHNWI searching for a long-term passive investment vehicle, real estate private lending holds extensive and diversified opportunities. Although our notes are generally one year in duration, which allows for liquidity, almost all our investors at CLI are with us for the long-term.

Private mortgage investing is seeing continued growth among accredited investors and family offices who want to park their cash, preserve wealth, and accumulate more assets. Strong and stable returns with steady cash flow are the common reasons for participating in this growing sector. Private mortgage investing also has a low correlation to stocks, and the ability to diversify loans across borrowers, risk categories, and geography.

Types of Private Mortgage Investments

With Canada’s economy continually expanding and dragging real estate prices beyond the reach of many Canadians, many first-time home buyers are finding it increasingly difficult to obtain a mortgage from a traditional bank due to increasingly tighter restrictions placed on applicants. Mortgage qualification criteria including income, down payment, and credit history are several factors that banks take into consideration when evaluating a potential mortgagee.

These qualifications tend to hinder Canadians from achieving their dream of homeownership. This expanding void is filled by the private mortgage lending industry where flexibility in mortgage terms is offered in exchange for higher interest rates.

People who were turned down by the traditional banks look for private lenders that are not covered by these mortgage rules to avoid the stress qualification test, despite the higher interest rates. But, it is not only the residential borrowers that are flocking to the private lending community but also borrowers seeking a commercial mortgage to finance a retail or office space for their business, complete a residential and commercial development, infill projects, amongst other commercial uses. This has brought about various different kinds of players in the industry offering different types of mortgages packaged in multiple forms. These include peer to peer lending, syndicated mortgages and Mortgage Investment Corporations (MIC).

Private Lending Market Growth

The new mortgage rules set by the Bank of Canada will disqualify about 1 in 10 borrowers in cities like Toronto and Vancouver; this ratio will potentially scale to 1 in 8 and is pushing borrowers to look for alternative lending options including private lending and mortgage investment corporations or MICs.

For over a decade, the private mortgage lending industry has grown and evolved considerably due to a number of reasons including stricter bank rules and rising interest rates, risky stocks as well as a low housing supply.

MICs have been seeing dramatic growth over the last several years as investors search for return and capital preservation. According to a recent report by the Bank of Canada (Residential Mortgage Market in Canada – A Primer- Financial System Review), alternative sources of capital including MICs make up approximately 2.6% of the residential mortgage debt outstanding in Canada.

Investor Advantages

Private lending has been a lucrative business providing for not only high yields but also monthly distributions. If you plan to be a private lender, you can impose a higher interest rate usually between 6%-18%.

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With the rising interest rates affecting housing affordability in 2019, many Canadians who are not eligible to obtain bank loans are increasingly moving towards considering private mortgages. This provides investors with opportune timing to participate in the many benefits private lending has to offer including:

  • Investments are directly secured by real estate, thus providing reduced risks. Lenders assess the property’s value prior to approving loans
  • Average rates of returns are typically higher compared with mutual funds and GIC’s
  • Investors have full control over lending areas, property types, and loan terms (depending on the type of mortgage invested)
  • Lending firms can match investor’s capital and risk profiles
  • The borrower is responsible for the monthly income payments as per agreement
  • Mortgages are shielded to protect your principal investment to a greater extent as there is a strong underlying asset securitizing your investment compared to a stock investment

One point of caution to make when considering becoming a private lender is the time dedication factor. This is where a lending institution like CMI Lending would remove many of the hassles involved with the sourcing of mortgages and facilitation of paperwork as well as all legalities involved allowing for individuals and corporate investors to access Canadian real estate markets and take advantage of economies of scale not available to them as individuals.

CMI Lending works with investors to educate them on the contributing factors underpinning the security and performance of their mortgage investment including:

  1. Due diligence process by verifying all the required information regarding the asset you are lending against.
  2. Plan and understand the exit strategy
  3. Understand the LTV or loan to value ratio threshold

CMI Lending partners with investors providing for exceptional risk management, a long track record of experience, and the capability to hedge against losses.

Takeaway

CMI’s investment research goes beyond simply qualifying each individual investment deal. They undergo extensive efforts to understand the industry and its underlying fundamentals, focusing on framing the investment opportunity for value creation through in-depth market analysis.

As an investor looking to participate in private mortgage investing, look for a company that employs a thorough due diligence process to identify opportunities and risks, ultimately adding value to your portfolio. Participate in the education process and grow your investment knowledge alongside your investment portfolio.