Nowadays, many TV shows feature people buying or flipping properties, renovating their homes for profit among countless other real estate opportunities. Watching the subjects of these shows transform into wealthy people can be very convincing; however, if you’re strapped for capital and time, then it may seem like an opportunity out of reach for you.
You may have considered getting involved one way or another as the allure of passive income seemed like a simple process worth exploring. Following some initial research, this investment vehicle became more and more intimidating with the capital requirements exceeding your investment budget and the complexities of the vast array of investment options becoming overwhelming.
Recent news circling the booming trend of commercial real estate in Canada sheds a spotlight on larger profits derived from commercial real estate; however, owning and managing this property asset can be stressful and time-consuming.
If you are a landlord, you have a long checklist to complete from paperwork, tenant screening, monthly rent collection, and maintenance to name a few. Dealing with such tasks can not only drain your enthusiasm for a higher income but may also come with greater risk exposure. Although owning property can bring you a great deal of money, there are other worthy alternatives to generating income without owning any property.
Some investors have built immense wealth in real estate without owning a single property. Some ways in which they grow their money involve investing in real estate equities through ETFs, real estate mutual funds, mortgage loans, or real estate investment trusts, to name a few. Aside from the time savings that they bring, these passive income investments can outperform directly purchasing a property in many ways and are not merely a substitute strategy.
These real estate investment alternatives provide more significant and better benefits without the stresses and hassles involved.
Real Estate Investment Trusts or REITs are companies that own, manage, and operate commercial or residential real estate. They enable investors to buy and sell their shares while having the REIT to pay off dividends.
REITs are a sound option for hands-off investors. Depending on their structure, REITs can be publicly traded or held privately, most of which are usually in the form of equity and not debt. These investment trusts pool investors’ money to acquire properties, manage them, and generate income through rentals or mortgage interests.
Why should you choose REITs? REITs are cost efficient, relatively diversified, professionally operated, and hence can be less risky compared to other forms of investment.
Available for sophisticated investors are private equity (PE) fund investments which allow them to park their money for some time and simultaneously earn income. When you invest in PE, you become a partner in specific projects that include land acquisitions and working capital investments.
As a partner, you usually get paid at the completion of the construction through a lump sum, as opposed to the monthly payments provided by private mortgages. Although PE offers excellent investment returns, the risk is also higher compared to other investment alternatives.
Perhaps you might have heard about the recent crowdfunding of business startups locally in different parts of Canada. Real estate is one of the top crowdfunding investments to date.
Crowdfunding sites are considerably new, with the JOBS Act was enacted in the U.S. in 2012. In Canada, under the Accredited Investor and OM exemptions, equity crowdfunding has become legalized on a provincial level starting with Saskatchewan in 2013. In January of 2016, Ontario, Manitoba, Quebec, New Brunswick, and Nova Scotia legitimized crowdfunding.
Crowdfunding provides opportunities for the average investor to become involved in large commercial real estate projects and other investments that would commonly require a large amount of capital. It doesn’t matter if you only have smaller capital contributions since other investors will join in and add more money to the given projects. There are more than a hundred crowdfunding online platforms registered in Canada, so you have to be diligent in finding the best fit.
Now, if private mortgage investments are of interest to you but the idea of owning and managing them seems daunting, then you may want to consider mortgage investment corporations or MICs. As the name implies, MICs operate similarly to REITs, collecting investors’ money and investing in mortgages. MICs have more flexible mortgage rules compared to those typically found at major banks.
Mortgage lending can generate steady and secure income; however, this will depend on the location of the properties and the type of loans, in addition to several other criteria. As an investor, conducting thorough due diligence on the loan portfolio will hedge your risk.
In comparison to individual private lenders, investors in a MIC are more insulated from mortgage risk exposure because they participate in a pool of mortgages rather than hold one specific (or even a few specific) underlying property. Canada Mortgage and Housing Corporation (CMHC) insured mortgages are seeing a decline in arrears with their mortgage loan insurance portfolio seeing an overall arrears rate decline from 0.29% to 0.27% in the second quarter of 2018.
In a similar fashion, a MIC is able to cushion its risk exposure to arrears by diversifying its capital amongst several investments. A MIC that maintains a prudent risk management process can grow its portfolio while holding its mortgage acquisitions in line with a balanced risk profile.
You will find numerous resources online with varying opinions on which locations to invest in. One source cites Halifax, Montreal, and Ottawa as solid opportunities. Location, by itself, will not hedge your risk exposure completely. Investors will find opportunities with strong yields even in cities where the overall yield rate is relatively weak. There are many variables that companies like CMI factor into their own risk management equation before allocating their fund’s capital.
It can be tedious and time-consuming to analyze these investment vehicles and the risks associated with every opportunity, nullifying the benefits of passive income generation through non-acquisitional real estate ventures. CMI takes this burden off the shoulders of its partner investors’, allowing them to grow their wealth without having to obtain and manage physical properties. However, as with any investment, risks are always present. Speak with an experienced mortgage investment advisor, who can assist and help you decide which investment opportunity is best for you.
Another limiting factor in acquiring a property for the purpose of investment involves financing.
Investors’ funding options can be heavily limited with access to favourable lending rates restricted by stricter loan rules, so they tend to look for private lenders.
If we look at the bigger picture, there is a broader opportunity for private mortgage funds to grow quickly and steadily. With the wealth of potential available, the challenge for private mortgage investors may actually be choice paralysis and an avalanche of due process requirements. Mortgage investment advisors like CMI cut down the vetting process and optimize an investment’s chances of success—for both investor and borrower.
Traditional lenders have a rigid funding structure that is inflexible to not only the types of borrowers’ situations but also the types of loans sought. A borrower may come in different forms that our regular banking institutions simply don’t have have the framework to support.
For instance, an owner residing in their property may be seeking to add an addition to their single-family detached home. As renovation financing is not a typical case that a bank would regularly entertain, the borrower would need to seek out a private mortgage fund to accommodate their more unique lending criteria.
No matter what type of loan a borrower is seeking, there is usually one thing in common that most lenders will have. There has to be some reasonable expectation that the borrower will eventually repay the loan. Traditional lenders have a thorough lending process that takes into account the borrower’s credit score as well as their debt-to-income ratio. While private money lenders tend to place more focus on the underlying real estate asset, banks are more fixated on the borrower’s financial situation. This is where a debt consolidation solution from a private lender can help put a borrower on the right path to restructuring their finances, better positioning the latter for future bank loan applications.
Private lenders also encounter working capital loans, which are common amongst business owners seeking to bridge any gaps in operational cash flow shortfalls. For example, a manufacturing company may go through cyclical periods of production where retailers may not need their products in the same consistent quantities. As such, slow periods with low orders will put the owner in a cash shortfall position. One thing that will remain relatively constant for the owner is their overhead. Their associated costs with production, including wages and rent, still need to get paid. This is where a working capital loan can provide the owner with some breathing room until their revenue recovers.
As the diversity of borrowers continues to expand in addition to the demand in personalized funding options, traditional lenders are not set up to adapt to this changing landscape. This is where a gap exists for private lenders to fill and ultimately capitalize on for the benefit of their investors.
With the volume of mortgage opportunities growing, the resulting deal flow pipeline expands for private mortgage fund providers like CMI. While the volume of potential deals increases, the underwriting process has to weed out the favourable loan opportunities from the ones that may be fraught with risk.
The team behind CMI is responsible for all aspects of the underwriting process. They begin their loan analysis by reviewing and scrutinizing the applicants behind every mortgage through an extensive qualification process. After carefully reviewing the applicant’s financial capacity, they appraise the property and evaluate the risk exposure in addition to the yield potential. The risk-to-reward ratio is then evaluated in consideration of their investor’s investment appetite.
As each investor has specific investment goals and risk tolerances, CMI takes time to assess and understand their clients’ needs to craft a personalized investment for them. A successful private mortgage lender will have an in-house mortgage team with designated roles working in unison to form an integrated platform, ensuring a seamless and well-coordinated process. At CMI, the simplified version of this process would function in the following manner:
CMI assists new and experienced investors alike. Experienced investors continue to look to CMI for assistance even with decades of experience under their sleeves. Some of the benefits they seek when they come to CMI include:
If you are planning to invest in private mortgages, consider partnering with a company that specializes in private lending opportunities. To compete with the comparatively inflexible financing structures offered by large financial institutions, institutions like CMI provide opportunities to investors and borrowers by having the ability to execute financing structures that are customized to the specific needs of borrowers.
Leveraging their internal streamlined processes—including underwriting, deal flow, and loan servicing—a private lending company like CMI provides a way for individuals and corporate investors to access Canadian real estate markets. Clients are also able to take advantage of economies of scale not available to them as individuals.