IPR AGREEMENT FAQ – 9 OF THE MOST COMMON INVESTOR QUESTIONS REGARDING IPR AGREEMENTS
- What is the contract interest rate?
- How is the Projected Yield Calculated?
- What is the Loan-to-Value (LTV) that you can finance against my property?
- What are the pre-payment penalties?
- What happens at the end of the term and the tenant cannot get non-private financing?
- What documentation will I need to provide?
- How is Amansad Financial Services compensated?
- What is the most efficient way to close a file?
- As an investor, Can I use an IPR on to payout an existing poor performing private mortgage?
- Are there other companies offering this type of investment to investors?
FAQ 1. What is the contract interest rate? Answer: Interest rates do not apply. Payment is based on a lease factor of the Investor Purchase Price. For example, a purchase price of $300,000 with a lease factor of 0.0075 = $2250/month. ($300,000 x .0075 = 2250)
FAQ 2. How is the Projected Yield Calculated? Answer: The Projected Yield has a front end and back end calculation.
Front End Calculation: = Cash Flow per Year / Months / Net Funds (Example: $12,000 / 12 months / $100,000 = 10%) Back End Calculation: = [Total Realized Cash Flow + Buyback Sale Profit] / Total Lease Term / Net Funds (Example: [$60,000 + $100,000] / 60 months / $100,000 = 26.67%)
FAQ 3. What are the pre-payment penalties? Answer: Pre-payment penalties do not apply to these type agreements, however if a Tenant wants to re- purchase prior to the end of the term, the investor must agree. In addition, the pre-payment applied against an investor’s mortgage needs to be adjusted and added to the buy-back price.
FAQ 4. What happens at the end of the term and If the tenant cannot get financing? Answer: It is the tenant’s responsibility to save their down payment & improve their situation to buyback the home.
- Amend the closing date on the purchase contract.
- The tenant can assign the contract to another party that can purchase it for them.
- Obtain a private mortgage to 80% of the property value, and confirm if the investor partner will agree to a vendor take back mortgage for the shortfall. At least 10% down payment is required at that time, plus applicable fees.
If the above options are not exercised by the tenant, as the owner of the property, you can evict.
FAQ 5. What documentation will the tenant need to provide? Answer: Pretty much the same documentation that is required on a typical mortgage file:
- Two Pieces of Valid ID
- Satisfactory Income Verification (Ex. Job Letter, Recent Paystubs, etc.)
- Mortgage Statement & Property Tax Balance Statement
FAQ 6. How is Amansad Financial Services compensated? Answer: On each deal that is presented, Amansad Financial will have an accepted offer to purchase already in place with a deposit. The buyer will be listed as ‘Amansad Financial Services and/or assignee(s)”. Once an investor has confirmed they would like to proceed with a file, Amansad will order a residential home inspection, and send an invoice for the assignment fee. Once the assignment fee is received, the file will be instructed to the law firm to complete the investor transaction, & prepare the lease agreement & future-buyback agreement.
FAQ 7. What is the most efficient way to close a file? Answer: Cash Purchase & Refinance after closing. All transactions are based on an investor securing a mortgage to 75% of the purchase price to minimize net cash output per deal. If able a cash purchase followed by a refinance after closing is the most efficient way to close this type of deal.
FAQ 8. As an investor, Can I use an IPR on to payout an existing poor performing private mortgage? Answer: Yes. If you have a private mortgage that is causing grief and will not be renewed and are even considering foreclosure action; an IPR is a great alternative investor cost effective solution when refinancing isn’t an option for the borrowers. Because a majority of private mortgage lenders/investor only lend up to 75% – 80% of the property value, an IPR is a great solution to allow a homeowner to hit the reset button, while staying in their home. It creates a winning outcome for all parties.
FAQ 9. Are there other companies offering this type of investment to investors? Answer: Yes & No. Some companies offer a similar service and it is referred to as a Rent-to-Own Refinance; however there are some key differences:
- With other companies the purchase price for the investor is at market value, and the equity is used as a future down payment to buyback that is held in trust. The problem with this approach is that the funds held in trust can be challenged. To avoid this, an IPR purchase is at a below market value, and puts the onus on the homeowner turned tenant to get the affairs in order before the e nd of the term. By purchasing below market value, it creates an instant return on your money.
- With other companies, a portion of the rent is credited as an ‘option credit’. With IPR the rent is 100% profit. This also makes it very easy for your accountant when reporting income.
- With other companies, if the Rent-to-Own contract is poorly written, it may not be accepted by the financial institution at the time of buyback. Also, many financial institutions do not accept Rent-to-Own, partially due to the stigma. IPRs are technically not Rent-to-Owns because there is no option down payment to purchase, and there is no ‘option rent credits’. It is simply a long term lease, a standard purchase contract with an extended closing date where a tenant needs to get their affairs in order to buy.
If you have any further questions, please do not hesitate to ask.
If you are considering what to do with your RRSP funds, one thing to consider is the real estate market. As a private mortgage lender, you’ll make more interest than a bank would, because you’re lending to someone who represents a higher credit risk. However, the fact that people will pay their mortgages first and neglect other bills instead means that, even if your borrower runs into a financial situation that is negative, you will still get your money. The interest rates from government secured investments are much lower than what you can expect from a mortgage as well. Here are some key fact that you need to know before entering the mortgage market, though.
The Beauty of RRSP Arm’s Length Mortgages
1. Should you join a syndicated or non-syndicated mortgage?
A syndicated mortgage has multiple investors putting money into one loan. In other words, the property only has one mortgage listed, but there are several investors or lenders taking part in that loan. Consider the example of a developer who needs $4 million to start building a new development. However, the developer has exhausted his lending limits at his bank. To invest in the project, twenty people combine funds to make a loan to the developer. None of the twenty had the $4 million that the developer needed, but when they pooled their funds they had it.
A non-syndicated mortgage only has one lender. If you are the only lender in a non-syndicated mortgage, you receive all of the profit. Your investment is higher, but you are also not running the risks that are often a part of investing in larger real estate projects, particularly those that are under construction. When you’re dealing with a single family dwelling, there are a lot fewer potential pitfalls than there are if you invest in a larger development, that may not get finished on time or may not even get enough tenants to reach an occupancy level to turn a profit. This is why so many RRSP lenders turn toward a non-syndicated product.
2. Should you stay at “arm’s length” in your mortgage?
If you’ve done any reading about RRSP mortgages, the terms “arm’s length” and “non-arm’s length” mortgages have likely popped up. This has to do with your relationship with the borrower. If you have a familial relationship with the borrower (it’s your child, your sibling, your parent or another close relation), then it’s not considered an “arm’s length” mortgage. If it is someone who does not have that close relationship with you, then it is considered an “arm’s length” loan.
3. Can you use more than one RRSP account to fund the same loan?
You can fund mortgages totally or in part from your RRSP accounts. If you have multiple RRSP accounts but none is large enough to fund the loan completely, you can combine funds from multiple accounts.
4. What happens if the borrower defaults?
This is where the “risk” factor enters the equation. If a borrower can’t make monthly payments, the default process begins, and then the financial institution in charge of the mortgage will institute the foreclosure process. If a sale is enforced, you would get your payment at that point, although there are other remedies available as well. In addition, as a private lender, interest will still continue to incur and the legal costs associated with default are the responsibility of the borrower.
5. Should you insist on a first or second loan?
The term “first” loan means that the loan is the one that will be satisfied first when the property sells. If you have 1st position priority, the interest rate is lower due to a lower risk factor as compared to being a second position priority lender. The more risk you are willing to accept, the more flexible you can be about loan position.
If you are curious about investing your RRSP funds into a mortgage, give a professional at Amansad Financial a call today. We have assisted numerous investors become private mortgage lenders, and we look forward to helping you as well! Stop letting your nest egg dwindle away in government secured investments.
DISCLOSURE: Amansad Financial is not dispensing advice about what represents a quality investment but instead providing access to opportunities for our readers to evaluate for themselves. It is the lender’s comfort — and the lender’s choice.
Can the mortgage request be funded by more than one RRSP account?
Yes, mortgages can be funded wholly or in part from the annuitant’s RRSP. If your RRSP is not large enough to fund the entire mortgage, the mortgage could be split between your accounts and other RRSP fund holders.
What properties qualify?
Residential (max 4 units) & Commercial Real Estate
What type of monies can be used to fund a mortgage?
Cash, of course. RRSPs, Registered Retirement Income Funds (RRIFs), Locked in Retirement Accounts (LIRAs) and most other registered plans.
Are there any CRA rules and laws?
A mortgage, or an interest therein, in respect of real property situated in Canada is a qualified investment for a trust plan. There is no requirement that the mortgage be a first mortgage, second, or third, as long as the plan holder is provided a registrable interest.
CRA rules on RRSP and other registered funds investments:
The Canadian Revenue Agency (CRA) allows a wide range of investments to be held within registered accounts.
- Mutual funds
- Bonds and Debentures
- Term deposits and Guaranteed Income Certificates (GICs)
- Equity linked notes
- Rights and warrants
- Covered calls, long calls, puts, and LEAPS
- Gold and silver certificates
- Mortgages secured by real property
1st, 2nd, or 3rd Mortgages… Which is the safest/riskiest?
A mortgage loan secured in 1st position is commonly held by banks. Because a 1st position mortgage is registered first on title it’s safer than all mortgages registered after; 2nd or 3rd. In the event of default on a 1st Mortgage, the bank will try sell the property via power of sale or foreclosure. The 2nd mortgage holder would be next in line after the sale of the property. Whatever is remaining after 1st mortgage debt is paid would go to the next mortgage holder on title. Due to the higher risk, subsequent registered mortgages after the 1st
mortgagee are at a higher rate.
What do I do in the event of a borrower default?
If the borrower is unable to make his or her monthly mortgage payments, the financial institution administering the mortgage will place the mortgage in default. It will then attempt to collect the proceeds upon a power of sale of the property. There are alternatives to overcome this. Contact us at 1-877-756-1119 for alternatives.
What is the difference between Arm’s Length vs. Non-Arm’s Length?
The term “arm’s length” refers to how close or distant the borrower/property owner and the lender are in relation to each other. The CRA allows both arm’s length and non-arm’s length mortgages as allowable investments in an RRSP. See below for differences.
Arm’s Length Mortgage (Service provided)
This is a mortgage that allows RRSP holders to fund a mortgage to a 3rd party. The 3rd party cannot be related by blood, marriage, or adoption. Funds are self-directed RRSP. There’s great flexibility with this plus mortgage insurance isn’t required! Example of 3rd party include Friends, Co-Workers, Aunts/Uncles/Cousins and of course Strangers.
Non-Arm’s Length Mortgage
This mortgagor and the annuitant are one in the same. To qualify, the mortgage must be insured, and the rate must be consistent with normal practice. The relationship is of blood relation; parents, children, siblings.
What are the benefits in investing in Mortgages?
- Mortgage interest payment is a fixed income payment.
- Investing in mortgages is often less risky than mutual funds and stocks, because you are secured by both the borrower and the property.
- Investor / Lender has full console of investment they choose to be in.
- Full negotiation of the interest rates and terms with the borrower through the mortgage broker.
- Still invest in real estate but avoid being a landlord running after tenants is a smarter investment than owning the property and everything associated with ownership.
- Earn passive income while staying tax-sheltered.
I don’t have enough to fund a mortgage by myself. What are my options?
It is common to put together a number of investors who have never met into a group to fund a mortgage. Each investor is individually registered on title for the % of the mortgage they hold. Amansad Financial also has relationships with proven MICs (Mortgage Investment Corporations).
FAQ 10. How is the income generated from a private mortgage taxed?
Answer: This depends on how the private mortgage is funded. If the mortgage is funded via RRSP, the monies are only taxed upon withdrawal at your marginal tax rate. If the mortgage is funded personally, the income is added to your existing income and it is taxed at your current marginal tax rate. If the mortgage is funded through a company, consult with your accountant to determine if it would be best to claim income as investment, other, or passive.
If you’d like to get regular updates on available mortgages in Saskatchewan, Alberta or British Columbia, Contact Amansad Financial Services c/o DLC Brokers For Life
Inc. at 1-877-756-1119