Investing in private mortgages

Jason Geall of Corwin Mortgage Capital explains the value of investing in private mortgages. This alternative investment is relatively unknown to investors, and readers of Investor’s Digest of Canada have asked Jason to explain how to maximize returns from this alternative investment opportunity.

Private_MortgagesA few months ago, I wrote an article about how investing in private mortgages can be a fantastic way to diversify your portfolio. I was inundated with emails from Investor’s Digest subscribers with many great questions.

People were shocked to hear that you can get such incredible returns from investing in private mortgages. Many readers even expressed that they weren’t aware investing in mortgages was even an option. This time around, I want to answer some of the most commonly asked questions, which will hopefully shed some light on why a private mortgage investment could become one of the strongest in your financial arsenal.

The Q&A session for investing in private mortgages

Q: What returns can I realistically expect from investing in private mortgages?

A: This really depends on the brokerage you choose to invest in. However, at our brokerage, Corwin Mortgage Capital, average first mortgages range from 8.50 per cent to 9.75 per cent and second mortgages at 11.50 per cent to 14 per cent. Those returns go directly to investors. Some brokerages will offer their investors lower rates due to the fact that they will keep one per cent to two per cent as a management fee.

Q: How do I choose which deals to invest in?

A: The beautiful thing about investing in syndicated mortgages, as opposed to mortgage investment corporations or actively-managed funds, is that you can specifically choose the deals you like. I believe the loan-to-value ratio (that is, the size of the loan as a percentage of the property’s total value) and location are the two biggest factors in choosing which deals to take.

The lower the loan-to-value, the less risk you take on. In terms of location, invest where you know.

Q: 2nd mortgage rates are really attractive, but I’m worried about the risk.

A: Second mortgages absolutely have higher risk, but this can be mitigated by looking at the loan-to-value. Remember, you are looking to protect your investment in a worst-case scenario. The worst-case scenario in the mortgage investment business is that a borrower defaults and refuses to pay his mortgage. While this is extremely rare (less than three per cent in our case), it can happen.

Choosing private mortgages with a lower loan-to-value is how to protect yourself. We do not lend when the loan-to-value exceeds 70 per cent. Some lenders will go higher, but we try to be conservative.

As an example, take a home worth $1 million. We will only lend a maximum of $700,000, assuming the home has no other debt attached to it. In the case of a second mortgage, if the home had a first mortgage for $500,000, then we would only lend $200,000.

This means that in a situation where the borrower goes into default and we have to sell the house, we have $300,000 worth of room to recover our costs, penalties and fees.

Q: I keep hearing about new mortgage rules coming into play, along with real estate prices going down. How does that affect private mortgages?

A: There are new mortgage rules coming into place soon, giving borrowers less buying power than they have now.

The major issue for borrowers is that real estate prices have levelled off but real estate is still expensive. Borrowers are now going to have to look to alternative lenders to close their purchases, or to simply make up any shortfall from the banks.

This is where we as private lenders can come in and help. These new rules will increase the amount of deals we close. As an investor this means you’ll be seeing more and more investment opportunity.

Scoping a good investment in private mortgages

Q: I’ve seen a few deals recently, and I’m interested in them, but I’m not a real estate expert. What do I look for when analyzing deals?

A: We touched on this a little bit earlier, but what I like to do when looking at deals is take a look at the location with Google maps. Get a sense of the area.

Also, does the deal come with an appraisal? Always look at the appraisal. See when it was appraised. If you’re investing in a deal right now, but the appraisal is from March 2017, you know that the value has dropped significantly since then.
Another thing I recommend is making sure the appraisal was performed by a third party, and not by the brokerage that you invest with.

Q: I’ve been an avid investor for years, but I’ve never invested in private mortgages. What are the benefits over traditional investments?

A: Great question. Many of our own investors started off having never invested in private mortgages. However, some now have more than 85 per cent of their portfolios invested with us.

The beauty of private mortgages, aside from the excellent returns, is the time frame and the cash flow. Most private mortgages are on a one-year term, which means as an investor your money is only tied up for a year at a time.

Investors are paid interest monthly, which provides excellent cash flow. At the end of the term, you receive your original investment back.

Q: Who should I invest with?

A: The most important distinction to understand is between the two different types of private lenders.

There are syndicated private mortgages, and mortgage investment corporations. To keep it simple, syndicated mortgages are invested in on a deal-by-deal basis by investors.

Mortgage investment corporations act as funds. They will pay a set rate while you keep your money in the fund. You as an investor have no control over deals that a mortgage investment corporation invests in. In a way, it mimics the mutual fund investment strategy.

A benefit to this is that you can just write a cheque and not have to pick deals. That being said, many investors like to know exactly what they are investing in.

We believe that over the next few months, the private lending business will continue to see explosive growth.
If you find the ability to control what real estate you invest in exciting, then syndicated private mortgages could be the right way for you to take advantage of the trend.

Jason Geall is the vice-president of Corwin Mortgage Capital, a licensed mortgage brokerage dealing exclusively in private mortgages. Corwin currently has around $160 million worth of mortgages in Ontario and is accepting new investors. Anyone interested in more information about investing in private mortgages can reach him at or 416-804-0534.

This is an edited version of an article that was originally published for subscribers in the November 24, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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