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