First, a private mortgage loan agreement is going to outline what you are going to get as a return at the beginning of the investment. There is no speculation as to what the return will be nor is the return any way dependent on market forces.
The return is also a very fair return when you compare it against things like T-Bills, GIC, Term Deposits, CD’s and the like.
And all private loans are made with the end in mind meaning that an exit strategy to repay the funds is typically required by a private lender or investor before a deal is approved and funded.
Another major benefit that has led to private real estate loan investing growth is the fact that your investment is secured by real estate. Provided that you’re lending considerably less than 100% of the fair market value of a piece of real estate, there is very little risk of investment loss due to the legal rights an investor has to realize against their registered real estate security in the event of a loan or mortgage default.
Compare this to just about any other type of investment that yields a similar return and you’ll be hard pressed to make a better cash for investor dollars than that provided through a private mortgage.
Most private mortgages are also for a period of one year, so investors also have the ability to stay relatively liquid, or through diversifying part of their portfolio with private mortgages, become more fluid.
Even when the money is coming due, you as the investor have the option to extend the mortgage if its working for you and you don’t have another immediate avenue or need for the money.
This is a very common common questions with a very simple answer.
A private mortgage is no different than a bank mortgage. A loan agreement is registered against a real estate property in first or second position and the investor or lender retains the same legal rights to enforce their security as a bank would have.
Private lending is actually quite straight forward with most of the process managed by the investor through a mortgage broker and a real estate lawyer.
There are times when individual investors will shy away from private lending against real estate property, or take their time getting into it, due to a fear of the unknown.
Compared to most investing options, it is very easy to get into and the risk protection afford those investing considerable.
The number one goal for any investor placing money into private mortgages, or any investment for that matter, is the preservation of capital. Profitable returns are based on a continuous flow of positive earnings without any erosion of the principal.
We manage this with our investors by making sure the loan to value ratio on a given mortgage provides for manageable risk.
Getting into higher ratio mortgages can provide attractive returns, but eventually they can lead to capital erosion as well through loan losses.
By placing mortgage funds that make sense from a real estate security point of view, capital is preserved through out the investing process. This doesn’t mean that you’ll never have a default or problem with privately funded mortgages. But it does mean that when you do have a problem, there is a security buffer to protect you from losing any money.
Another way to make sure you’re investing in deals that make sense for you is to invest locally.
In most cases, private investors will lend in their local geography because of their own knowledge of the local real estate market, and the access that local deal provide in term of going to look at the property and meeting with the borrower if required.
This doesn’t mean you can’t or shouldn’t do deals farther away. If that makes sense and you’re comfortable with the deal, there is no reason not to.
But when you’re starting out, working locally can provide you with more knowledge and comfort related to any deals you may consider investing in.
For the 1st and 2nd mortgages we place, the average rate of return would fall in the 7% to 12% range.
Higher rates of return are certainly possible, but they also come with higher risk.
If you’re lending in the 50% to 60% loan to value range, then rates in the 7% to 8% range are going to be most common.
For deals at 80% loan to value, the rate will be more in the 10% to 11% range.
If want to learn more about private mortgage investing or need some help placing money into private mortgages, then I suggest that you give me a call to and we’ll get all your questions answered right away.
The strengths of private lending are speed to getting a deal in place, and the ability to leverage property equity on an unfinished piece of work.
So while lower cost forms of conventional mortgage lending may be preferred in most cases, there are times when a bank or institutional lender are just not going to be a good fit in moving your project forward.
For instance, lets start at the very beginning when the land is being acquired. Private mortgages can be ideally suited for bare land financing, especially on property that requires considerable work before a subdivision project can be completed. Many times, conventional lenders will not fund bare land depending on location, zoning, etc.
Private mortgages can also be great forms of bridge financing during the development when the project needs to get more work completed and hit certain milestones before a conventional lender is prepared to provide funds for site development or vertical construction.
Its not uncommon for a subdivision development to run out of money between the time of property purchase and plan approval. At the plan approval stage, the property can typically be re-appraised to reflect the change in value associated with the approvals in place for the subdivision to move forward. But until approvals are in place, appraisers may not be able to increase the value of property beyond the purchase price, especially if the property purchase was recent.
Private lenders who lend on construction and site development for subdivision have the ability to review the work done in the planning process to date, where draft plan approval has not yet been reached, and get a level of comfort to provide additional mortgage financing against the property that can help get it to the plan approval milestone.
This may not result in a private lender assessing a higher appraiser value from the purchase, but it can result in them providing a higher loan to value.
For example, if the land loan for purchase was at 50% loan to value, a 2nd mortgage near the end of the planning process may be able to be done up to a level of 75% loan to value. The additional capital may be crucial to keeping the overall project on track including not only the site planning approvals but the resale marketing as well.
Private money being put into place in a timely fashion not only helps pay the bills as they come due, but also provides the developer with the time necessary to complete the milestones a conventional lender may require be met before a mortgage refinancing of the overall project can take place.
Bridge loans can also be accessed at other stages of the project when cash flow cannot quite get the work completed for the next financing milestone, or to step in and replace a conventional subdivision development financing application that is in excessive delay in processing.
Whether as a primary or secondary option, private construction mortgages can be an excellent source of subdivision development financing.
It’s not uncommon for a developer to come to us looking for a condo development bridge loan for their residential property and not be able to qualify with a conventional financing program due to the level of sales or pre-sales that have been made to date.
Most bank or institutional lenders will require unit sales of anywhere from 70% to 80% of total available condo units before they are going to be prepared to finance a condo development project.
In many cases, the client falls short of this mark at the point where more capital is required to keep the project moving forward resulting in key crossroad for the developer.
If more funds cannot be secured by the condo project, everything can start to unravel with pre-sales actually going the other way if too much time with no progress taking place.
And while getting another investor could be a workable strategy, its not always easy to locate someone prepared to invest money right now that is comfortable with the project and where its at. Plus being in a position of requiring capital is a bad negotiating position which could see the developer giving away a good chunk of his profit.
So a potential solution to this challenge is to get a construction bridge loan in place to provide incremental funds for the project, keep the work moving forward, and provide time to get the pre sales to a level where the preferred condo construction and development loan can be secured.
This strategy can work if there is equity in the property that can be leveraged to secure an additional loan. Its not uncommon that a development property will appreciate after purchase once the planning has been approved and some of the site work completed. Even in situations where there is a first mortgage in place, a bridge loan can be secured in a second mortgage position. This will be at a slightly higher rate than a first position bridge loan, but compared to the costs associated with the project slowing down or stalling, the incremental cost is going to be extremely minimal in most cases.
Plus, remember that this is a bridge loan and will only be in place for the time it takes to qualify for a larger condo construction development mortgage which will occur when pre sales get to the right level.
Bridge lenders are interested in these types of situations because the project is far enough along that it already has pre-sales and there is a clear path to getting to a sales level that will allow for the project refinancing that will pay out the bridge lending source.
If you have a condo development project that is facing this challenge, or some other challenge with respect to securing incremental financing, I suggest that you give me a call so we can quickly go over your situation and requirements and provide relevant options for your consideration.
There are times when a business or property owner will need to refinance their existing first mortgage in order to get additional capital, but may not be able to immediate secure a long term “A” rate mortgage in its place.
This tends to happen if there is some type of strain or bruising of the credit standing and financial performance of the company.
In these situations where short term qualifying issues can be resolved in a relatively short period of time, typically less than 2 years, a two step financing approach can be deployed where by the needed incremental capital is secured right away through a new private mortgage and a long term financing solution with an “A” lender is put into place as soon as the credit and/or financial issues are resolved.
So the first step in the two step process is to refinance the existing commercial mortgage with private financing that has a term of one to two years. The interest rate is obviously going to be higher than an “A” mortgage but the added cost in many cases is a small fraction of the benefit to be secured or the cost to be avoided by getting the mortgage refinanced on time and potentially providing incremental capital when required.
From a cash flow point of view, because a private mortgage is typically interest only versus having to pay a combined principal and interest payment from an “A” type lender, the monthly debt servicing will tend to be very similar.
Once the private mortgage is in place, the business and property have now been stabilized, allowing for the time and funding necessary to get back to “A” lender qualifying status.
If this can be accomplished in 3 to 6 months, the private loan can be retired early and refinanced into a bank or conventional mortgage.
On the surface this may seem like a much more expensive process for getting financing in place.
But if the alternative is not getting funds in place when required, it may be one of the cheapest options available to you.
Further, many times private lenders will work with existing appraisal and environmental reports provided that they are still representative of the property. This can save a considerable amount of time and money related to getting the original commercial mortgage refinancing completed.
The video in this post goes through an example of an actual case where two step financing was required and the circumstances that led to it.
If you have a need draw incremental funds out of a commercial property that has a mortgage, or just need to replace a commercial mortgage that cannot be renewed by the existing lender, then I suggest that you give me a call at 416 464 4113 for a free assessment of your short term commercial mortgage refinancing options.
If you’re an investor looking to put funds into private mortgages, one of the first things you’re going to want to better understand is the rate of return you can expect to receive from your investment.
With private lending, the rate of return is made up of an interest rate charged on money borrowed as well as any lender fees that are part of the loan commitment.
For today, I’m only going to focus on the interest rate you can expect for either a first or second mortgage as lender fees may or may not exist in any one particular deal.
The following interest rate ranges I’m going to provide for private 1st and 2nd mortgages can be applied to both residential and commercial real estate lending scenarios.
When looking at first mortgage financing opportunities, a private lender should expect a return in the 7% to 12% range with the majority of deals being priced between 8% and 9%.
An interest rate of 7% is going to command a very high level of equity and a corresponding low loan to value whereas rates at the higher end of the range are going to relate to higher loan to value scenarios where the maximum financing amount one can expect is 85% loan to value.
In our office, it is fairly rare that we place private mortgages in the 80% to 85% range as they are higher risk and not something that most of our private lenders have an appetite for.
The interest rate range on a private second mortgage is going to be higher, landing in the 8% to 15% range.
The higher rate is relative to the higher risk of being in a second mortgage position where you have less coverage on your loan compared to the first mortgage holder.
Similar to the discussion above on private 1st’s, to get a private 2nd mortgage at an 8% interest rate, the overall loan to value ratio is going to have to be low indicating that the borrower has a considerable amount of equity in the project to cover off the lender’s funding risk.
Real estate based loans in second mortgage position that are at the higher end of the range will relate to higher risk scenarios which include applications like construction or high ratio debt refinancing requests.
Some private lenders prefer small second mortgages because of the higher level of return they afford, but they will also stick to smaller loan amounts to reduce their potential risk of loss.
If you’re current a private lender, or would like to become one and want to learn more about the different potential rates of return that are available to you, then I suggest that you give me a call so we can go over your investing criteria together and see if we can match up rate and risk scenarios that can meet your investing requirements.
This dilemma exists because there are so may slices to the private mortgage market.
For instance, at the highest level of market segmentation, your strategy for investing can involve residential versus commercial and industrial property. Then there is lone size to consider, application of funds such as for debt consolidation, construction, and development, then there is geography, exit strategy, loan to value and mortgage position…
The list of potential areas to focus on is almost endless, which can make it difficult for some investors to get started.
When I get calls from investors that want to discuss potential private lending through our brokerage, the strategy to consider many times becomes the focus of the conversation.
Unless the investor has some predetermined investment criteria that would dictate what type of financing strategy should be considered, I tend to suggest the following approach.
By focusing your attention on what you know, have experience with, and are comfortable assessing, you can form a basic investment strategy for getting started with private mortgage lending.
Too often potential lenders and investors make the whole process too complicated and talk themselves out of putting money out in the market.
But getting started can be as simple as just focusing on what you know.
I had an investor call me wanting to invest in private mortgage, who had made quite a bit of money successfully completing land development projects.
The obvious starting point was getting him involved in some development financing deals.
Sometimes when investors start with what they know they never even consider other parts of the market which can work just fine.
The key here is that there a multitude of potential mortgage investment strategies out there and utilizing any of them is related to your personal comfort with the knowledge required to make a good investment decision.
In the fairly rare situation where someone with money to invest does not have a professional knowledge or expertise to draw from when assessing private mortgage opportunities, we suggest that they start small with residential property mortgages.
All investors have experience owning a home and/or rental property. And being that residential is the largest segment of the market, its still possible to draw from what you know and focus in on the most straight forward and lowest risk residential mortgage opportunities available.
If you want to discuss private mortgage lending strategies, give me a call and we’ll go over what is the most relevant to your investing criteria and knowledge base.
Click Here To Speak Directly To Toronto Private Mortgage Broker Joe Walsh
Even though private mortgage investing in on the rise, there are still many investors out there that do not diversify their portfolios with private real estate loans due to a number of fears.
Today I want to talk about the three most common concerns/fears I hear from investors on a regular basis and why I don’t believe these issues should be a road block to taking advantage of all the great opportunity available in private mortgage financing.
While there are other areas of concern that I hear from investors regarding getting involved with private mortgages, these three are by far the most common.
So let’s get into each one separately.
When speaking with a potential mortgage investor the first area of concern tends to be risk management. This starts with the lender or investor trying to understand how any type of private mortgage can be considered a strong investment when potential borrowers are inevitably individuals who can’t get mortgage financing from a bank or institutional lender for some reason.
Investors considering private mortgages can have a hard time believing that private lending risk can be managed when you’re dealing with someone with credit and/or cash flow flaws already.
Risk management starts with risk assessment in which you’re making sure you clearly understand the financial and credit background of the borrower as well as the back story that has led him or her to seek out a private mortgage.
Successful private lenders focus on make sense lending and capital conservation which all starts with the risk assessment that needs to be performed before money is ever advanced.
Many times investors have this vision of paper work and administration staff associated with banks that they think will transcend to their own mortgage lending activities. Most private lenders are individuals and the thought have having to take on a lot of administrative related work is not appealing to most.
The reality is that private mortgages, for the most part, are extremely easy to administrate. Most private real estate loans are for a period of one year and the borrower provides 12 months of post dated cheques to cover off the monthly loan payments. At the end of the loan term, the funds need to be repaid. There is not really any complexity or significant work volume involved.
When I say things have gone bad, I’m speaking of a borrower default where the lender now has to turn to their legal recourse options and a power of sale action.
If a borrower defaults, the process for capital recovery is turned over to a lawyer for the most part.
And regardless of how long a power of sale action takes, if the initial risk assessment was done properly, all capital will be recovered and accrued interest paid.
The risk of loss and capital erosion are mitigated up front which is why real estate backed lending is becoming more and more popular as compared to other forms of investing that provide similar levels of return.
If you’d like to know more about private mortgage investing, then I recommend that you give me a call so we can discuss not only your concerns but your lending requirements as well.
Click Here To Speak To Toronto Private Mortgage Broker Joe Walsh
If you’re going to be a private mortgager lender or investor, then you need to strongly consider developing a working relationship with a strong mortgage broker that works with private mortgages in your area.
There are a number of reasons why I think this is important, but let me boil this down to what I would consider to be the top three reasons.
So let’s get into the first reason which comes right at the start of the lending process, and that’s deal flow or lead flow.
If you’re a private lender, when you have money to invest in mortgages, you want to be able to find a mortgage that meets your criteria rather quickly and get your money back out into the market earning a return. A lack of deal flow will cause you to have to sit on funds for longer periods of time that you would like, earning no more than bank interest in many cases.
The second aspect of good deal flow is that you want to be able to find deals that best fit your criteria versus settling for deals that you’re not completely comfortable with because deal flow is rather scarce. A good broker relationship should afford you with the deal volume to not only place your money quickly, but also place funds into deals that properly fit your lending criteria.
After deal flow, the next big reason for working with an experienced broker is deal and risk assessment. And experienced broker has learned over time what to look for and how to unearth all the warts and blemishes related to a private mortgage deal. He or she also knows and understands the importance of full disclosure to the lender and works hard to make sure that you have all the relevant information in hand to properly understand the deal and assess the risk of funding it.
Brokers who do not work regularly on private deals are less likely to provide the deal assessment support you are looking for which will in turn end up providing limited value to your own assessment process.
And in the cases where a private lender looses money on a mortgage, you can point back to flaws in the assessment process that were not uncovered or properly scrutinized.
The last key reason for utilizing the skill set of a private mortgage broker is to increase the closing rate on deals you provide funding offers for.
Once you assess a deal and provide funding terms, there is no guarantee that the deal will close. In fact, many times deals will fall apart by a lack of proper coordination of all the closing elements such as appraisals, legal, insurance, accounting, etc.
A competent mortgage broker will be well versed in the closing process and have the skill set necessary to get everything completed in the time required by both borrower and lender.
Getting this additional help can certainly lead to more profitable private mortgage portfolios and should really be a strong consideration by any private mortgage investor or lender.
If you’re a private lender, or an investor that is thinking about investing in private mortgages, one of your number one concerns is going to be understanding and managing the related risk of your investment.
This is going to be the case regardless of what type of investment vehicle you’re looking at, but when it comes to private mortgage lending, what’s the best way to understand and manage risk?
For the private mortgage lenders I work with, one of the things they really rely on is the risk assessment I provide to them.
The primary goals of my risk assessment process is to determine the strength of the security being offered as well as the borrowers ability to pay.
Of these two, the first part, security assessment, is always the most important as it relates directly with the ability of a private mortgage investor to conserve their capital over time.
This is important due to the fact that regardless of how hard we try to avoid default or foreclosure situations, they can and do happen and when they do, we have to be in a position to get all the capital back through the foreclosure process.
One of the more typical examples of an unforeseen mortgage repayment problem is when a husband and wife enter into a divorce proceeding. When the mortgage was initially issued, there was sufficient cash flow to service payments and equity in the property to cover the risk of loss. But during a divorce, sometimes neither side ends up making the payments and the mortgage falls into arrears which will not get made up until a foreclosure action is taken.
Regardless of the reason for mortgage arrears or default, the strength of the mortgage investment comes back to the risk assessment done before funds were advances, that made sure their was sufficient security and liquidity to get capital repaid and conserved.
The initial risk assessment typically focuses in on the liquidity of the market and the resulting loan to value that would relate to that liquidity.
For instance, larger urban centers will always have higher liquidity than smaller centers, so its always important to make sure that the amount of equity in the property relates to the potential resale-ability of a given property, or its liquidity.
In the event of default and potential foreclosure, an experienced mortgage broker will many times manage or coordinate the repayment process for the lender.
This reduces the lender or investors concern about the process, allowing them to rely on the mortgage risk assessment to make their lending decision.
When there is a repayment problem, its going to take some time to get capital back in the hands of the lender which will cause some inconvenience.
But in the end, capital is conserved through full debt and return repayment that results from that initial assessment being properly done in the first place.
Our goal with our investors to make sure that the initial mortgage assessment not only outlines the borrower and market risks, but also considers the lending criteria and risk preference of the investor. In this way, regardless of what occurs with loan repayment, we are always on solid ground to be able to conserve investor capital.
Click Here To Speak Directly To Toronto Private Mortgage Broker Joe Walsh
If you can’t get mortgage financing from a bank or can’t get it quick enough to meet your requirements, one option to consider is private mortgage lending.
The private lending market has grown considerably over the last number of years and provides real options to borrowers looking to leverage real estate property.
But many potential borrowers either don’t consider private property financing at all, or have some out dated misconceptions as to how private lending actually works.
So today I want to dive into what I consider to be the leading misconceptions regarding private mortgage lending. If you agree, disagree, or have some other thoughts, please join the discussion below.
The first misconception I want to discuss is based around what types of scenarios private lenders will lend against
This is a long standing myth that just because someone is a private lender they are prepared to finance any type of real estate property for any type of scenario.
To take it even a step further, there are property owners that don’t like to disclose all of their information for whatever reason and if a bank or institutional lender persists, they will withdraw their application and go to a private lender, thinking that selective disclosure is going to be ok.
In many cases, private lenders can require considerably less application information, but they certainly are going to want whatever information is necessary to understand and assess the risk of the deal.
If the deal doesn’t make sense, or the risk is too high (or too difficult to determine), the lender is likely going to pass on the deal.
It is totally erroneous to think that a private investor/lender will finance any type of deal you put in front of them.
Another major myth or misconception is that private lenders charge outrageous rates and fees that will be difficult to afford or cash flow.
This again is pretty far away from what actually happens in the market place.
Yes, private lending rates are going to be more expensive than a bank mortgage, but that’s directly related to the risk of the deal. If the risk of loss to the lender is low, the cost of financing will reflect that and as the financing risk increases, so does the rates.
Because this is a competitive market, private lenders that price above the risk of any particular deal will stand to lose out to competitors that price accordingly, letting supply and demand balance out.
And in some cases, private lending can actually be cheaper than conventional lending alternatives once you factor in prepayment penalties on mortgage refinancing and the opportunity cost lost from not being able to secure financing on a timely basis.
The last misconception I want to discuss is that private lenders are tough to deal with if you’re ever late with a payment or fall into a foreclosure situation.
Some people believe that private lenders will somehow take a more aggressive approach than a conventional lender when it comes to collecting their money.
In reality, a private mortgage provider has the same legal rights as any other mortgage lender and will follow very similar processes when dealing with loan defaults.
In fact, you might actually discover that a private lender is easier to work with if you want to discuss getting some extra time to make a payment, or working out a plan to bring your account up to date.
The bottom line here is that private lending is one of the simplest most straight forward forms of lending available in the market today. Private lenders work from a “make sense” point of view and for the most part are easier to work with because they do not have the type of administrative bureaucracy you can expect from a major branded lender.
Click Here To Speak Directly to Toronto Private Mortgage Lender Joe Walsh For a Free Assessment Of Your Private Mortgage Options