Stable returns, cash flow from private mortgages

Why invest in private mortgages? Unlike stocks, funds or traditional real estate investments, private mortgages are relatively safe investment vehicles that allow generous, stable returns and produce strong cash flow. Corwin Mortgage Capital vice-president Jason Geall makes the case.

Cash_Flow_from_Private_MortgagesIt’s been almost a year since I last wrote here about investing in private mortgages, and what a year it’s been. Our company has grown from $100 million in active loans to more than $200 million.

As most of you are probably aware, the Toronto real estate market took a fairly considerable hit, thanks to a variety of different circumstances. However, most of us in the real estate world, whether real estate agents, mortgage brokers or analysts, agree that the market bottomed out and things have stabilized.

The Toronto Real Estate Board (TREB) releases market data the first week of every month, and the numbers are very encouraging. In July of this year, residential home sales were up 18.6 per cent in the Greater Toronto Area compared with last July. Average single-family detached house prices rose by 4.8 per cent on an annual basis to $782,129.

This trend has continued, with August showing a 4.7 per cent price increase compared to the year before, while sales volume rose 8.5 per cent.

Similarly, in September, home prices rose 2.9 per cent in selling price, from $774,489 in 2017 to $796,786 in 2018.

So, the market conditions are healthy, but what does this mean for you as someone interested in investing in private mortgages? It means the asset you are lending against is stable, and prices are going in the right direction.

Investing in private mortgages is nothing new; in fact, it’s been around for as long as people have been getting mortgages. The fact is, not everyone can qualify for a mortgage, and here in Canada, it has become harder and harder.

Traditional mortgage market changing

Starting in January of this year, due to new federal mortgage rules, all new uninsured mortgages, that is, mortgages with less than 20 per cent down, must go through a ‘stress test’. This test looks at a borrower’s ability to pay if rates increased by two per cent, among other things. With the Toronto-Dominion Bank fixed five-year rate sitting at 5.59 per cent (similar to other lenders), this has left many Canadians unable to purchase a home. According to a report by the Mortgage Professionals of Canada, 18 per cent of Canadian mortgage applicants were disqualified on this basis.

We have witnessed this firsthand. We have seen banks that have cancelled deals with borrowers at the last minute simply because the rules changed, leaving borrowers desperately looking for a mortgage to close their new purchase or refinancing. What was the result for us in the private lending business? Excellent-quality product.

People tend to think that in the private lending world, we deal with credit-compromised, debt-ridden and ‘deadbeat’ borrowers. Nothing could be further from the truth.

While we do deal with credit-compromised borrowers, due to the fact that we are lending based on the asset, most of our borrowers tend to fall into a weird zone. They include borrowers who have good credit, good income but are self-employed, own multiple properties or do not show very much income. We have loans in some of the most prestigious areas of Toronto (Forest Hill, Rosedale and the Bridle Path) with doctors, businessmen and everything in between. Indeed, the Bank of Canada notes that nearly eight per cent of Canadians’ mortgages are held by private lenders. Surprisingly, however, we have not seen an increase in defaults. The fact is, people do not want to lose their homes.

Safety, stable returns and good cash flow

So why invest in private mortgages? Unlike stocks, funds or traditional real estate investments, private mortgages are relatively safe investment vehicles that allow tremendous, stable returns and generate fantastic cash flow. Investing in private mortgages allows you to invest in real estate without the headaches of dealing with tenants, repairs or the hundreds of other issues that can arise from owning property. You’re also investing in real estate at a heavily discounted rate. In the mortgage-lending business, everything is considered in terms of loan-to-value, or LTV. As the term suggests, LTV is the loan amount divided by the value of the property. Our business only lends to a maximum of 75 per cent of the value of the home.

We look at this as lending 75 cents on the dollar against a real asset. Often, deals use an even lower maximum LTV, further reducing your exposure as an investor. These assets are professionally appraised by companies who can be sued for giving the wrong values, so we feel extremely confident in the appraised value.

Typically, investors see a return of 7.5 per cent to 9.75 per cent on first mortgages, and 10 per cent to 14 per cent on second mortgages on a one-year term. Rates vary depending on the location, the borrowers, and the loan-to-value.

Catching up on reader feedback

After my previous columns, we had a tremendous response from Investor’s Digest readers who expressed interest in private mortgages, many of them becoming investors. One Investor’s Digest reader in particular has invested almost $4 million into deals over the last year, with an average yield of nine per cent.

Many retired readers expressed interest simply because of the cash flow, short terms and security. Readers also reached out to ask excellent questions. Some of the most common questions were:

■ “Is there a minimum amount that someone can invest in a deal?” There is a $25,000 minimum investment per deal. However, as an investor, you pick and choose the deals you invest in. We are not a mortgage investment fund. We are a mortgage syndicate.

■ “What happens if a mortgage goes into default?” Our lawyers start the enforcement process immediately. If a borrower does not wish to pay their mortgage, we will start the power of sale process, or sell our mortgage to another private lending company to get our principal out and back to our investors.

■ “I’ve heard of stories of fraud. What can I do to protect myself?” Mortgage fraud typically stems from lending more than the property is worth. This is more common in land and development deals. For example, a piece of land that is worth $500,000 as-is, could be worth $10 million if developed. Some businesses might raise $5 million telling their investors the transaction has a 50 per cent loan-to-value ratio, whereas in reality it was 2,000 per cent loan-to-value. Luckily, these types of business get shut down. In Ontario, for example, authorities have beefed up regulations and oversight specifically to combat fraud of this nature.

Always research any property you invest in, and research any business with which you decide to invest in mortgages.

Jason Geall is the vice-president of Corwin Mortgage Capital, a private lending company based in Toronto that is currently accepting new investors. He is not a financial advisor, nor is this article intended to give investment advice. Anyone interested in more information about investing in private mortgages can reach him at jason@corwincapital.ca or 416-804-0534.

This is an edited version of an article that was originally published for subscribers in the November 2, 2018, 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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