When an investor chooses to put money into private mortgages, they have certain criteria choices they need to make to qualify potential deals of interest.
This would include things like type of property, location, financial and credit profiles of the borrower, lending amount required, loan to value, and so on.
One of the biggest single points of differentiation among private lending sources is whether they are interested in funding first mortgages or seconds mortgages.
In terms of total private lenders, there are more strictly focused on private seconds over firsts, or a combination of first and seconds for a number of key reasons.
The following reasons for investing in seconds are going to vary in their priority and importance from one investor to another, but virtually all will be important to any investor.
The first one I want to mention is profit opportunity.
A mortgage in second position is more risky than a mortgage in first position when there are two different lenders involved.
Therefore, there is a premium attached to this risk that is added into the cost of financing.
So private seconds provider a greater level of return. And with higher loan to value ratios offered, the rate charged can be still higher.
The second key reason is deal size.
The amount of financing required to fund a deal is typically significantly smaller than the average first mortgage.
This allows a private investor to spread their risk over a number of different second mortgage positions versus perhaps having all their mortgage money in one or two 1st positions.
This also makes it easier to get started in equity investing as subordinate debt mortgage financing can start at really any amount with private seconds typically being made in the $20,000 to $50,000 range.
The third reason is customer demand and deal flow.
With the growing overall level of consumer debt in the market, there is continually a need for individuals to access the equity in their homes to consolidate debts and get their cash flow and credit back on track.
This creates a continuous deal flow available, especially if you’re working with a mortgage broker that has a focus on these types of financing requests.
So when you have money available to invest, there is always good potential to get funds into the market in short order and earning a return.
The last key reason I’ll mention here is liquidity.
Almost all private seconds are issued for a term of one year. Because the funds may be used for bridging some transaction or event, the repayment can even be less than a year, providing short term repayment of funds advanced and liquidity to the lender in the process.
Compared to investing in longer term debt instruments that pay considerably less or investing in the stock market, the liquidity offered by private lending can certainly be preferred.