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How to Use Registered Funds to Become a Mortgage Investor

How to Use Registered Funds to Become a Mortgage Investor

If you have money in such accounts as an RRSP, LIRA, LIF, RRIF, RESP or TFSA, then you have registered funds that you could put towards a mortgage investment – and any income that you would make from your investment would be tax sheltered.

It is worth noting that, should you need to take money out of the registered investment, it can be subject to taxation at the current rate, which is 49 percent in the highest bracket. If you use a non-registered investment to make money via capital gains, the tax rate is half that of personal income.

The difference in tax rates means that it is vital to understand what you are doing when you choose the funds that you use for a particular investment. The purpose of this article is to provide you with information about different types of registered funds that are eligible for use in a mortgage investment. This article does not constitute specific professional advice for your own portfolio but instead serves as a general overview, for informational purposes only.

Types of registered funds that are eligible for use in mortgage investing

RRSP

This is a Registered Retirement Savings Plan, which in Canada allows you to deposit savings as well as investment assets. Income that your RRSP makes is generally tax-exempt as long as you leave the money in the plan; you only pay taxes on the money that you withdraw. The funds in this account can be used for a mortgage investment.

LIRA

A Locked-In Retirement Account is basically a locked-in version of an RRSP, and it holds funds that you transfer in from a registered pension plan (RPP). The member of the RPP cannot receive these funds until they are transferred to another LIRA to give the member income during retirement. If the money stays in the LIRA, the money has to stay there and will purchase a life annuity once the member reaches retirement. However, you can use the money in this fund to invest in a mortgage; the proceeds simply have to stay in the LIRA as well.

LIF

A Life Income Fund is a destination account for pension funds or funds from a LIRA. The funds in this account can go to invest in a mortgage.

RRIF

A Registered Retirement Income Fund is a retirement plan in Canada under which taxes are deferred. People use an RRIF to turn their savings into income. You can move funds from your RRSP, a pooled registered pension plan (PRPP, an RPP or another RRIF, and the provider pays you. These funds can also go toward mortgage investment.

RESP

A Registered Education Savings Plan is an account that parents set up to sock money away for their children’s education expenses after high school. The individual and the organization set up a contract whereby the individual deposits funds in the RESP and makes money off investments that the organization makes. These give users access to the Canada Education Savings Grant (CESG), and you can invest money from one of these accounts in mortgages.

TFSA

A Tax-Free Savings Account gives all Canadians 18 years of age and above the opportunity to stow away money without tax liability throughout their lifetime. The maximum for this, as of 2014, was $5,500, so you would want to check this before setting this up. All withdrawals and income earned from this sort of account are tax-free, and this account does not jeopardize access to federal credits and benefits. Money from this sort of fund can go toward a mortgage investment.

Why would you want to invest money in mortgages?

There is a balance between risk and reward that is important to negotiate when you are planning your financial future. If you put all of your money in accounts that are secured by the government, your interest income will not keep up with the increases in the cost of living, because there is no risk to those investments. Certificates of Deposit offer slightly higher rates, but you are tying up your funds for, potentially, years at a time, and with returns that do not justify them, at least as far as tying up your whole investment portfolio.

You also do not want to put all of your investment money in stocks and bonds, though. The returns can be significantly higher, but when the market hits a downturn, there is nothing stopping your market value from going down, and if your investment time-frame is short- or medium-term, the oscillations of the market can be more than you can put up with.

The risk of mortgage investment is slightly higher than the risk of investing in a savings account or a CD. It is possible that the borrower could default. Life happens – people go through divorce, job loss, or serious illness or injury, and their financial pictures fall apart. However, in the vast majority of cases, borrower pay their mortgages and, in the rare instances when default looms as a possibility, they sell their homes, and if you have invested in a syndicate that keeps loan-to-value (LTV) ratios conservative, you will get your investment back.

Mortgage Investing Opportunities

Opportunities to invest in mortgages exist all over Canada. Banks are dealing with tight regulations about which borrowers are creditworthy and which are not, which means that there are many Canadians with the means to pay for a mortgage – but who cannot qualify with banks or credit unions. So investing in a mortgage is a chance to take part in a win-win: profits for your investment, as well as a chance for a borrower to move from the rent cycle to home ownership. In the long run, both of you benefit, and as your investment profits build from mortgage investments, you can take part in multiple loans or fund larger percentages of loans. Given that home ownership is a dream for so many Canadians, the opportunities for you to invest are almost limitless. Sign up as an Investor Partner to be part of the Amansad Direct Lending Group and learn more about how we can work with your investment portfolio and make it grow!

Private Mortgage Investing in Ontario

Real estate investing has proven lucrative for many Canadians. After all, prices tend to always being going up, particularly in hot spots in Ontario such as the Toronto area. The only real headache, at least for property investment, involves the dealings with the property itself – finding it, buying it, preparing it for resale and then securing a buyer. Each step involves costs and fees that subtract from your final profit. However, if you invest in mortgages, then you make a profit on the lending end without all of the logistical steps involved with buying and selling properties. Your profits might end up smaller over time, but you are assuming less risk and making more reliable money over time.

How would investing in mortgages in Ontario work with the Amansad Direct Lending Group?

It would work for you in the same way that it works for banks and credit unions, except you are investing using your funds where the details of the applicant and property are pre-screened prior committing to invest. Just like a bank, you are lending money against a tangible asset that has a set value. With a private mortgage, the term is not a 15-, 20- 30-year amortization, as with a traditional mortgage through a bank or credit union. Instead, most private mortgages have a term that lasts a year, possibly two (with renewal a possibility, if you are willing). With the terms come significantly higher yields (ROI) Return on Investment is between 10 and 12 percent for a first mortgage and between 12 and 18 percent on a second mortgage. As an investor, that is a much higher return than what you would find in a government-secured savings account or Bank Term Deposit. The specific rate varies with the credit score of the borrowers, the location, the loan-to-value (LTV) ratio on the property and the existing conditions in the market. Many of the borrowers have the means to pay the mortgage and often have 1 or multiple obstacles preventing them from qualifying at the bank. This could be a credit issue, being self-employed with little verifiable regular income, multiple properties, in the midst of a separation/divorce, and the list goes on. Any of these issues make it problematic when dealing with a traditional bank or credit union.

Should you invest in a mortgage investment corporation (MIC) or a syndicate?

An MIC works much like a fund. As an investor, you would deposit money with the MIC, and then the MIC management finds mortgages to fund, making the decisions themselves. The average return from an MIC ranges between five and eight percent, and investors need to expect to start with an initial stake between $50,000 and $150,000. You would receive interest payments monthly or quarterly, depending on the terms of the MIC.

If you decide to pursue investment in an MIC, make sure you look at the parameters it has established for acceptable risk. What is the highest LTV ratio that it will fund? How many of the mortgages are in first position, as opposed to second? Are most of its mortgages funding residential or commercial properties? In which parts of Canada does it provide funding?

There are two possible negatives with respect to an MIC as opposed to a syndicate. Your returns are lower, and you do not get to pick the mortgages that you fund. Once you invest, the MIC management makes all of those decisions. Another is that, in Canada, income on mortgage investments is taxable as interest income. So while you do not have to deal with acquiring and selling properties, you might want slightly more input into the decision.

If this is the case, then you might think about a mortgage syndicate. A syndicate is a group of investors who pool their funds into one mortgage, and you can find syndicated mortgages through licensed brokers that have received certification through the Financial Services Commission of Ontario (FSCO). You choose the mortgage(s) in which you invest, and you control the money.

Once you have let a broker know that you are interested in joining a syndicate, the broker will send out emails once potential deals come through, and you can decide whether or not to invest. You can choose parameters such as geographical location (such as the downtown Toronto area), investment amount, interest rate, property value, whether the mortgage would be in first or second position, and so on. You have the chance to look at the property appraisal, and you can invest when you are ready – and at the level you want to invest. Payments come via direct deposit or post-dated cheques, depending on the brokerage policies.

What happens if the borrower defaults?

This happens much less frequently than you would think. People who own single-family homes will let every other bill lapse before they go into foreclosure. Even if they start to fall behind, they will sell the home before foreclosure can take effect. With each brokerage, the policies for dealing with default will vary.

Here is the usual process in the rare case that a borrower stops making payments. First, your lawyer (or the MIC’s lawyer, if you follow that route) will send a letter to the borrower demanding payment. In most cases, the borrower is willing to get back on track and you can actually make some additional money on late fees or an interest penalty. However, if the borrower cannot get caught up, you can exercise the power of sale 15 days after the loan goes into default – technically, 15 days after a payment goes late.

After that, you would have to wait 35 days to sell the property, and from the proceeds you can take your original investment, along with interest penalties and any other fees, including attorney and court fees.

Your other option would be foreclosure, which is much more involved and takes a much longer time – which makes it much less common in Ontario, but more common in the Western provinces.

When working with us, we also provide opportunities in Alberta, BC, Manitoba, and Saskatchewan. Contact Us if you are interested in becoming an Investor Lender Partner.

The Benefits and Drawbacks of Investing in Alternative Mortgage Lending

The Benefits and Drawbacks of Investing in Alternative Mortgage Lending

With increased prime rates and more government mortgage regulation, private lending has seen an increase in activity and market share. Private lending is a multi-billion dollar industry.

Outside of investing as an individual private lender; the two most common ways for investors to enter alternative lending is by way of a syndicated mortgage or in a Mortgage Investment Corporation (MIC). Both of these entities lend money to borrowers considered higher credit risk, but it is important to know which represents the better opportunity for your portfolio, as well as the key differences between the two.

Syndicated mortgages involve a combination of two or more individual investors lending their money to a particular borrower on specific real estate. The funds could go toward financing a condo, a single-family home, a sizable project for a developer, and anything else where real estate is being used as collateral.

Benefits:

  • Syndicated groups can appear on the title
  • Syndicated loans are direct loans to the borrowing entity without any fees for a third party, which means there is more return for the investor, usually above 10 percent.
  • Mortgage brokers who are looking to reduce risk on investment generally look for syndicated mortgages.
  • Investors know who is borrowing their money and what project their money is funding.
  • Syndicated mortgages bring in cash each month.

Drawbacks:

  • All of your investment is going to one entity.
  • If the entity (individual or developing company) can’t pay the note, you could end up having to take him or her to foreclosure.
  • If you are new to real estate investing, you may not have the will (or the savvy) to push the process to foreclosure.
  • If you end up having to go to foreclosure, that cash flow comes to a halt and your eventual return can end up having to wait for months. If the loan went to a project that was still in the building phase at foreclosure, you might not recoup much of your investment at all.
  • Borrowers can pay back their syndicated loans early, depending on the contract, which means that you may have your money sitting idle while you’re waiting for the next borrower.
  • Not all syndicated mortgages are eligible for TFSA or RRSP.
  • Mortgage Investment Corporations (MICs) are capital funds that shareholders raise and then lend to a pool of commercial and residential mortgages. When you invest in a MIC, you buy shares in the corporation, and it invests money for you.

Mortgage Investment Corporations (MICs) are capital funds that shareholders raise and then lend to a pool of commercial and residential mortgages. When you invest in a MIC, you buy shares in the corporation, and it invests money for you.

Benefits:

  • Investing in a pool of mortgages eliminates much of the risk that comes from investing in a single project.
  • MICs employ professional underwriters who review the applications and make decisions about whether those potential mortgages meet risk guidelines.
  • MICs provide monthly income that can be eligible for TFSA or RRSP deposits.
  • The monthly cash flow comes from a pool of payments that come in each month, which means that there is no term for the loan to expire; the money comes in continuously, so your money is not sitting idle between loans.
  • In case of default, a mortgage is just a small percentage of the larger risk pool, so cash distributions do not undergo anything close to the risk associated with syndicated mortgages.
  • Returns on investment average between 7 and 8 percent annually.
  • MICs offer memoranda that indicate the general rules and restrictions, such as the highest loan to value ratio allowed by the project.

Drawbacks:

  • MICs have more overhead, which means you will pay a management fee. This is why your return will be often 2 or 3 percent lower than what syndicate mortgages target.
  • Make sure that your MIC has a third-party advisory board that reviews loans to make sure that they fit the parameters in the memorandum.

When choosing between a syndicated mortgage and a MIC for your investment, the key questions have to do with your experience in real estate investments and your capacity for handling risk. MICs offer significantly less risk because they have the personnel to screen mortgages, and the risk is diluted by investment in a pool of loans. If you are a partner in a syndicated mortgage, you and your group are responsible for pursuing foreclosure; if you invest in a MIC, you have none of that exposure.

What are Standard and Collateral Mortgage Charges?

What are Standard and Collateral Mortgage Charges? Things to Know Before You Sign a Private Mortgage

When a borrower takes out residential mortgage, that real property provides the security for repayment of the loan. A borrower will need to sign a charge document for the lender establishing this security, and the lender will register this document with the land registry office within the province or territory where the property is. This charge document bestows several rights on the lender, such as the right to sell the property if a borrower fails to repay the loan according to the terms agreed.

A standard charge is registered on the property’s title in a document that has the basic terms of a loan. These include the principal, the interest rate, the payment amount and the term of the loan, among other things. Standard charges are registered for the dollar amount of the mortgage and just secure that one loan. If a property is valued at $600,000 and a loan is issued for $400,000 a standard charge secures the loan, the lender registers a standard charge for $400,000. If a borrower wants to refinance and take out more money, they have to go through the formality of paying off the first loan, discharging that standard charge, signing a new agreement for a new loan and registering the new charge on the property’s title.

With respect to bank-type financing; a standard charge is easier for a borrower to transfer from one lender to another, which means if a borrower reaches the end of a term and wants to move to a financial institution with a better rate, a borrower can generally do so without having to go through the registration process again. However, a borrower will face prepayment charges because they are technically paying off the whole note before maturity, depending on whether the mortgage was open or closed.

A collateral charge lets a borrower use a property as security on multiple loans. The lender might register this charge for a dollar amount that is higher than your first loan, so a borrower may be able to take out more money without having to go through charge registration again, so long as the total amount owed is not more than the original principal amount on the collateral charge. Let’s go back to the previous example, but let’s also say a borrower provides a $200,000 down on the house, leaving a principal of $400,000, but the charge was still for $450,000. A borrower can potentially borrow $50,000 more without having to register a new charge. The terms of this new mortgage would not be part of the title registry’s records on the property.

The convenience for the borrower is being able to borrow additional funds against the property without having to go through the registration process all over again. However, if a borrower wants to switch lenders at the end of a term, they would have to go through the process of registration all over again if the new lender will not accept the transfer. If the collateral charge also provides security for other debts to that first lender, you will have to satisfy those in full before that lender will transfer the charge or take that charge off the title.

Many of the Big Banks are issuing more Collateral mortgage, but they can restrict a property owner. Lenders always have to approve the additional funding. If they give a property owner a collateral mortgage and their situation negatively changes, it can be a cause for big problems. For example, if the income goes down, a property owner can end up in trouble and will be unable to access the equity in the property. For a lender, it provides a more options. Should a property owner default, a lender can proceed under the civil enforcement act and register a writ or opt for the standard foreclosure process.

At Amansad Financial, a collateral charge may be registered on a case-by-case basis to ensure an investors risk is minimized. At Amansad Financial, we look to ensure our investors feel safe with each investment opportunity.

IPR AGREEMENT FAQ

IPR AGREEMENT FAQ – 9 OF THE MOST COMMON INVESTOR QUESTIONS REGARDING IPR AGREEMENTS

    1. What is the contract interest rate?
    2. How is the Projected Yield Calculated?
    3. What is the Loan-to-Value (LTV) that you can finance against my property?
    4. What are the pre-payment penalties?
    5. What happens at the end of the term and the tenant cannot get non-private financing?
    6. What documentation will I need to provide?
    7. How is Amansad Financial Services compensated?
    8. What is the most efficient way to close a file?
    9. As an investor, Can I use an IPR on to payout an existing poor performing private mortgage?
    10. 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.

  1. Amend the closing date on the purchase contract.
  2. The tenant can assign the contract to another party that can purchase it for them.
  3. 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:

  1. Two Pieces of Valid ID
  2. Satisfactory Income Verification (Ex. Job Letter, Recent Paystubs, etc.)
  3. Mortgage Statement & Property Tax Balance Statement
  4. Appraisal

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:

  1. 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.
  2. 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.
  3. 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.

Unfolding the MIC (Mortgage Investment Corporations)

Unfolding the MIC (Mortgage Investment Corporations)

Are you looking for other ways to enter the real estate market as an investor? One possibility that has gained in popularity recently is the MIC (mortgage investment corporation). The purpose of this article is to help you understand how these work and to help you decide whether this is the investment for you.

What is an MIC?
An MIC offers private mortgages on real estate properties. Their interest rates are higher than what the banks post, because they accept borrowers with a higher degree of risk, usually because of low credit scores and/or income verification issues. The corporations take their funding from individual investors, investor groups and banks, and those investing entities receive some of the return on the mortgage in exchange for their investment.

Structurally, MICs resemble income trusts, in that they sent all of the income to their investors. This setup allows the MIC to evade most taxation, allowing the distributions to be larger. However, the tax burden then passes on to the investors, but we’ll get into that more in a bit.

Where can you hold an MIC?
You can keep MIC investments in tax sheltered accounts, such as your RRIF or your RRSP.

How is MIC income taxed?
When you receive a distribution from an MIC in which you have an investment, it is taxed like interest income. So whatever your marginal tax rate is would dictate how much of each distribution will end up in the hands of the government.

How much do MICs deliver in returns?
Returns on MIC investments vary, just like any other investment. Remember that you are investing in mortgages that are extended to people who cannot qualify for lending from banks and other traditional lenders, so the likelihood of default is somewhat higher. After fees, many MICs deliver returns between 8 and 10 per cent. If the economy shifted into a recession, though, and defaults went up, then those values would likely be reduced.

What kind of fees do MICs charge to investors?
Based on current market conditions, the fees range between 1.75 and 2.00 per cent.

What are the best parts?
This is the easiest way to invest in private mortgages without all of the red tape that some other avenues toward this investment represent. You do however need to qualify as an accredited investor.

What is an accredited investor?
Let’s get to it – you may qualify as an accredited investor in Canada if you meet at least ONE of the following:

Income

  • Your net income before taxes exceeds $200,000 in both of the last two years and the income is expected to be maintained at least the same for the current year; OR
  • Your combined net income before taxes, with that of a spouse, exceeds $300,000 in both of the last two years and the income is expected to be maintained at least the same for the current year;

OR

Financial Assets

  • You or together with a spouse, own financial assets worth more than $1 million before taxe deductions but net of related liabilities.

What are the real drawbacks?
Most MICs ask for a fairly large chunk of money up front, with $25,000 as a common minimum. You also have to agree to leave it in there for at least three years. That would be more palatable if you had some guaranteed distributions or at least the initial capital, but you don’t get anything like that. It’s true that most investments don’t come with guarantees, but they also usually come with a lot more liquidity.

The elevated risk is also a factor to consider, but you’re investing in people’s residences. The last bill that the vast majority of people will stop paying is the bill on their residence, because they don’t want to end up on the streets. So while default risk is something to consider, if you look at the pre-screening that the MIC does before extending the loans, you should get a better sense of what actual risk you are facing.

Why are MICs so popular right now? What do investors need to know about them?
A lot of investors are tired of the low yields that many traditional investment vehicles are bringing, such as bonds and low-interest GICs. MIC units offer a higher yield, and so many investors want to switch over to those units. However, they may not be aware of the lack of guarantee that comes with that change.

MIC units come with a limitation to a particular asset class – almost always residential mortgages – and this limitation can elevate the risk. There are other ways to invest in mortgages that allow you to take advantage of different classes.

With popularity comes a drop in the yield. The elevation in investment means that each loan has more competition for it. As a result, the interest rates drop, as do the fees charged at closing, which is why investor returns have started to dip in this vehicle.

When MICs are looking for more loans to take on so that investors can make money, they could face the temptation to take on borrowers who have increasing poor credit and income history profiles. As a result, default risk increases over time. In some extreme cases, this could turn into a sort of Ponzi scheme, as the directors of the MIC turn to new investors to fund the promised returns to old ones, until the actual capital assets run out.

How do public and private MICs differ? Which should I consider?
This is a question that more and more investors are asking. Ontario is one province that has instituted limits on the securities market, one of which keeps many investors from buying private MICs, only permitting them to invest in ones that are publicly traded.

Publicly traded MICs have more stringent regulations, including their disclosure requirements. Publicly traded MICs are liquid because they trade on the TSX. Share prices are transparent. Eight public MICs provide access to a wide variety of high-yield investments. All of them provide quarterly reporting – and seven of them send out cash flows to investors each months.

Some private MICs do offer higher returns than their public counterparts. However, that higher yield can come from extending riskier mortgages. Also, when you take out administration costs and management fees, the yields can end up a lot closer than you might expect. So if you’re considering investing in an MIC, you would be well served looking at the publicly traded ones first.

Wrapping Things Up
At Amansad Financial, our core philosophy is that each investor should have total control over the money that he or she invests. We never pool funds but instead keep the link between one investor and one property, although we have moved into equal split syndication, so that investors have more flexibility but the risk is also distributed equally. Investors for the mortgages we provide do not require you to be accredited, but a KYC (Know Your Client) form is still needed. Are you an investor looking for “passive income” while remaining involved and knowing where all of your capital goes? Get in touch with us – or sign up below:

Crop Production Booming in 2016

Crop Production Booming – Investing in AB Farmland is a positive

If you talk to a crop farmer, you’ll find out that the worst time to get excited about crop yields is right at the tail end of summer, because there are all sorts of things that can happen in the last weeks before the harvest, such as a plague of grasshoppers, a devastating hail storm, or a mysterious change in the rain patterns.

That hasn’t stopped Statistics Canada from forecasting that Alberta is headed to a terrific major crop yield in 2016. All three of the province’s major crops (canola, wheat and barley) are expected to come in well above the average yield from the last 20 years.

Barley’s predicted yield is about 4,000 kilograms per hectare, which is more than 20% above its 20-year average of about 3,300 kilograms. Wheat yields are predicted at 3,600 kilograms per hectare (compared to an average of 2,900), while canola yields are predicted at 2,300 kilograms per hectare (compared to an average of 1,800).

These predictions are still below the record levels of 2013, when a bumper crop drove all three yields to peak numbers. That was a terrific year for income for crop farmers in Alberta.

A lot of the factors that influence crop yield and development are at the whim of nature. There have been some improvements in farming techniques, crop science and other areas of technology that have driven average yields up, though. In the 1970s, wheat yields were about 75 percent lower than they have been since 2006.

There are six weeks left until harvest, so as long as Mother Nature doesn’t turn sour, the yields are looking terrific. Given the damage that low oil prices have done to the provincial economy, the farmers definitely need their luck to hold until the last crops are in the barn.

As an investor/private lender, if you are looking to invest and get a good return on good real estate, consider Alberta Farmland.

Make Your Own Rules When Investing in Real Estate

Make Your Own Rules When Investing in Real Estate

The stock markets tend to rise and fall, but one investment that moves higher and higher over time is real estate, in the form of buildings and land. While every portfolio should be diverse, adding land development, commercial buildings, single-family and multi-family residential buildings is another great way to build your holdings and returns as time goes by. In an era when pension plans are as rare as the mastodon, they are a great way to erect your own pension plan.

Many Canadians have already taken an interest in real estate investments, of course. A lot of people are moving beyond just owning their residence and even a vacation home, entering the property game, whether they are Canadians or foreign investors. After seeing the stock market fall through the floor in 2008 and 2009, they see real estate values as more reliable. Even though real estate prices fell to some degree then too, you can lose 100% of your holdings when a company’s stock falls apart, but you still have residual value in real estate that you can access if you need to.

There are other ways for Canadians to invest in real estate, of course. There are real estate investment trusts (REITs), mortgage investment corporations (MICs) and other types of equities focused on real estate, as well as crowdsourcing opportunities to enter the market.

TD Bank conducted in a survey In 2014 that found that about 40% of investors viewed real estate as an investment that always provides financial benefit. That same survey showed that about three-fourths of respondents thought that their home was an investment, and a third of the respondents had bought other properties as real estate investments. About a quarter had invested in REITs, and about 1 in 12 had invested in securities backed by mortgages. The respondents thought that real estate was the second-most reliable investment sector, behind the financial sector. The baby boomer generation was the most optimistic about real estate, which is not surprising given that primary residents have risen in value by an average of a whopping 52.2% between 2005 and 2012 – which includes the big drop in 2008 and 2009.

Not all real estate investments are the same, of course. In 2013, the REIT suffered mightily, and industrial and commercial properties are becoming hard to find in several areas in Canada.

Even so, experts are still pointing to real estate (in addition to a primary residence) as a terrific investment value. After all, a lot of people have emotional ties to their own homes and do not view them as clinically as they do, say, a balance in a mutual fund.

One key error, though, is viewing industrial and commercial real estate as behaving the same way as the residential market. One of the most profitable options is the multi-family building. Tenants move in and make regular payments which go up over time. Obviously, you need to set aside savings for repairs and management expenses, but so long as the building remains an attractive place for people to live, those checks will come in every month.

Commercial buildings can be even less hassle, because frequently they just have one tenant – which means just one party to keep happy. Of course, if the tenant moves out, your rent goes from 100% to 0%, whereas in a four-family building, if a tenant moves out, your rent income just drops by 25%. However, commercial tenants are also likely to stay longer once they are in the building.

Investing in industrial or commercial real estate often requires a bigger sack of money up front, often in the seven figures, so many investors will go in with other investors, either in a limited partnership or a joint venture. This also reduces your own risk and can lead to more opportunities. You do lose some liquidity in this arrangement if you want to sell out but the rest of the group wants to stick with things. Right now, supply is way down in the commercial and industrial sectors as well. A lot of the people who own those properties enjoy the rents and the appreciation in value – and they don’t have any interest in selling, which can keep the market on ice.

So if you are interested in entering the commercial or industrial real estate market, it can be good to enlist a realtor to pound the pavement for you and talk to people who are willing to sell their property before they put it on the market. Once a property in a good location goes on the market, there will instantly be as many as 20 other bids.

Private investors have been a part of as many as half of all commercial real estate deals in Canada since 2007. This includes investment families who are picking up properties to add to their estates as well as investors buying in groups. These private investors do not, by and large, have a board to report to, so they can adopt a little more risk.

If you don’t want to deal with tenants, and you don’t have enough cash on hand to buy a property or a part of one, you can still enter an REIT. Between 1999 and 2014, REITs delivered an annual rate of compound annual return of 13%. This beats the S&P TSX Composite Index by 600 basis points. What does this mean? If you’d sunk $1 million in the S&P/TSX Composite in 1999, by 2014 it would have been worth $2.75 million. That’s not bad, but in REITs, it would be worth $6.3 million. This includes the awful performance in 2013, when the 10-year bond yield shot up in Canada. That yield has gone back down, so REITs are back up and running. Lower interest rates have increased property values, which drives up REIT values as well.

REITs come with professional management groups and undergo scrutiny from analysts and investors. If you had invested in apartment REITs, you would have done better than if you had bought condos and rented them out to tenants – and you wouldn’t have to deal with the tenant issues.

The REIT is still very new to Canada, having just been around since 1994. When interest rates start to rise again, it will be interesting to see if REIT values come back down – which means that since rates are rock-bottom, you definitely need to consider holding the properties you have and adding REITs, instead of liquidating your properties to sink it all into REITs.

Another alternative to acquiring properties is the MIC. These companies provide short-term lending for residential and commercial properties, and they return the income as dividends. You have the possibility of a steady cash flow from both REITs and MICs. MICs only run about three years and can adjust their lending rates.

There is also the possibility of private mortgage investing. If you don’t want to get into a public market but don’t have enough cash to purchase your own land or building, there are many different private funds in which you can invest. Whether you take your money to an equity firm or deal with a crowdfunding site, there are plenty of ways to enter the real estate market.

Amansad Financial is a broker that offers mortgages to our clients. However, because of the various degrees of risk involved, we make the following commitments:

  • Our mortgages are not pooled
  • Our mortgages offer greater liquidity than pooled investments
  • You invest in a property, not a company (so you have equity)
  • There are no mandatory management expense costs because we only market self-administered mortgages. We refer clients who want third party management to Olympia Trust.

Pooled Mortgage Investment vs. Private Equity Investing

Pooled Mortgage Investment Corporations and Private Equity Mortgage Investing: A Comparison

Back in the 1970s, the Canadian government put together a company class specifically designed to help investors with small or medium portfolios to invest in the mortgage market. These companies were known as mortgage investment corporations (MICs).

You may still hear about these now and then from different brokers as you find new ways to boost your retirement portfolio. However, these investments come with a great deal of risky, and here’s why:

  • You don’t actually invest in the real estate. Instead, you invest in a company, which means your principal can vanish.
  • When the loan matures, you still can’t get your money out.
  • You don’t have the right to hire your own lawyer to represent your position within the company.
  • You have to have a special license from a Securities Regulator to sell this investment.
  • If you’re the buyer, you have to go over an “offering memorandum” (OM) with the broker, which is a detailed list of all of the reasons why an MIC is so risky for you to consider.
  • You can’t resell your interest in the company easily. In fact, some investments keep you from reselling your interest for an indefinite period of time.
  • In Canada, there has been no independent assessment by a regulator or auditor about the possible merits of investing in an MIC. You might read that there has been in a brochure, but that is not true.

An alternative to the MIC is private mortgage investing, or (PEM Investing). Here are some differences between the two products:

  • You can invest in a private mortgage through any licensed Mortgage Broker. There is no special license required to sell just these products.
  • Obviously, any investment carries some degree of risk unless you’re investing in a government-insured savings account. However, with PEM investing, you are buying a share in actual real estate, which means that you will at least have a share in the sale of collateral in the unlikely event of default and foreclosure.

At Amansad Financial, we do not offer our clients pooled mortgages. We make the following commitments to all of our investor-clients:

  • Each investment has a direct link to a property, not just to a company.
  • Our mortgage investments offer greater liquidity than pooled investments.
  • Because the mortgages that we sell are self-administered, there are no management expenses. If you want third party mortgage administration, we refer our clients to Olympia Trust.

 

Arm’s Length Mortgages

Arm’s Length Mortgages: Enjoy Significant Rewards with Reduced Risk

  • Does your RRSP return barely keep up with inflation?
  • Are you interested in taking charge of your investments?
  • What if you could earn over 10 percent on your RRSP investments with just slightly more risk than a savings account?

You might not think of home mortgages as a possible investment market. After all, most people associate mortgages with banks – and with huge stacks of paperwork. They don’t ever think they could get into making that sort of money.

They also don’t understand how much money you can make in mortgage investment. After all, a lot of the banks right now are offering rates below 6 percent on 30-year mortgages. That’s higher than what you get from a savings account – but not that much higher. The key for the banks is the benefit of volume.

If you want to invest in mortgages, though, you wouldn’t be serving the same applicants that the banks face. Instead, you would be working with one (or multiple) borrowers who represent a higher degree of risk. They either have credit scores that keep them from gaining acceptance from the banks, or they lack the verifiable income history that makes their applications solid enough – or both. You would be investing in the private mortgage market – and you could easily make well over 10 percent with the mortgage you granted.

How does it work? You serve as an investor (or the investor, if you have enough money) in an arm’s length mortgage, using your RRSP funds to help someone else achieve the dream of home ownership. Then you rake in the payments, month by month, earning well over 10 percent per year.

That’s right – you can use your RRSP money to fund mortgages for other people, so long as the transaction is “arm’s length.” This means that you are not related to the party. Throughout Western Canada, these mortgages are becoming more and more popular, as borrowers are having a harder time getting bank approval for their mortgages from lenders but they still have enough money to pay for a mortgage over time.

So how can you use RRSP money to fund mortgages? You can fund your own (but you have to pay it all back within 15 years). You can use RRSP money to fund a non-arm’s length mortgage for a family member, generally as a favor – but this has to be a first mortgage, and you have to get full CMHC insurance, and the qualification process for a normal mortgage applies. An arm’s length mortgage can be the first, second or third note on a property but may not be to someone in your family or extended family.

How do arm’s length mortgages benefit RRSP investors?
When you make an investment in an arm’s length mortgages, there are a number of benefits. Let’s take a look at some of them:

  • Reliable Return on Investment.
    For the life of the mortgage, you get money coming back to you at the same rate of interest. This can give you an APR as high as 30%, depending on the loan, so you can make a lot of money. Even if it’s just 12%, that beats the market in many cases.
  • Easier Retirement Planning
    Once you leave the workforce, it can be worrisome not knowing how much interest income you can expect from your portfolio each month. Using an arm’s length mortgage allows you to know exactly what to expect, month by month, to come into your RRSP account.
  • Reliable Term of Investment
    When you sign the paperwork on this loan, you’ll already know how long you can expect the money to be gone from your RRSP account – and when it will be back with interest.
  • Secured by Real Property
    Foreclosures are extremely rare in Canada – much more rare here than they were south of the border, when banks were failing left and right. Today, when you invest in a private mortgage with your retirement funds, in the extremely unlikely case of default, you have a property to take and to sell. This is a lot more reliable than simply buying an investment in a commodity or stock and just having a piece of paper.
  • Unlimited Investment Potential
    When the investment you made in one mortgage returns in full to your RRSP account, you can invest in another person’s mortgage. Of course, if you don’t want to choose another mortgage, you can choose any vehicle you want, whether it’s stocks, bonds, mutual funds or something else.
  • No Impact on Contribution Limits
    You’ll be getting a check in your RRSP account each month as the borrower repays the note. However, that doesn’t count toward your own contribution limits. So you can keep investing up to the full contribution limit at the same time that the borrower is paying you back for the loan.
  • Hassle Free Experience
    If you rent out a property to a tenant, you have a lot of potential headaches – missed rent, maintenance and replacing the tenant. With an arm’s length mortgage, all you have to do is sign the paperwork. A lawyer and trustee handle the day-to-day management of the situation for you. All you have to do is go to closing and sign the documents and then wait for the money to arrive in your account each month.

So how does it work?
Right now, in Canada there are two trust companies that deal with arm’s length mortgages: Canadian Western Trust and Olympia Trust.

What kind of funds can you use?
Well, we have talked a lot about RRSP funds. However, you can also use RRIF (Registered Retirement Income Funds) or LIRA (Locked in Retirement Account) funds.

You also don’t have to use liquid funds. If you have stocks, mutual funds, term deposits, debentures, bonds, gold and silver certificates, equity linked notes or guaranteed income certificates (GICs), those work as well.

If you’re interested in learning more, give one of our arm’s length mortgage experts at a call. Once you have determined that investing in private mortgages is for you, you will begin to see opportunities to add to your existing portfolio.

Mortgage Fraud is Thriving in Canada

Mortgage Fraud is Thriving in Canada

Mortgage Fraud is definitely thriving in Canada. The increase in government regulation of the mortgage industry has been instrumental in reducing the number of risky mortgages that Canadian banks have extended since the collapse of the housing market. It also means that there has been significantly less fraud, because banks have had to perform (and document) more due diligence than they did before the recession. However, this has caused banks to lose revenue as well, because they have had to turn away a lot of potential borrowers whom they would have approved in years past. While some of those borrowers might have defaulted, the vast majority would have made their payments on time, contributing to the bank’s profitability.

What this means is that banks are putting pressure on their loan officers to sell as many mortgages as they can inside the new guidelines, and then to augment the revenue coming into the bank, they are also told to sell such products as creditor protection insurance to borrowers. That adds to the balance on the loan, bringing in more principal and interest income to the bank. In the meantime, they are burning through loan officers, who are flaming out because of all the pressure. The end result is lending institutions and professionals in the mortgage industry who are committing fraud to get as many people into loans as possible. Previously, the concern about mortgage fraud was about potential borrowers making up information to gain approval, but the concern has now shifted to the institutions, who are trying to build up revenue through as many means as possible.

If you think about it, recent trends in the Canadian real estate markets cause this to make a lot of sense. Incomes are stagnating, but home prices are going up. That means that you have fewer buyers trying to buy more homes — while the prices are staying high, because the sellers are optimistic that they can get someone to pay what someone else paid for a comparable property a few blocks away. So brokers, lenders and realtors are all fighting over dwindling commissions — and the Canadian government keeps adding more and more rules to make owning a home more of an obstacle, causing new home sales to go down even further.

Consider the example of Home Capital Group, Inc. — the largest alternative mortgage lending source in Canada. In 2015, they severed ties with 45 different mortgage brokers. The reason? Someone send an anonymous letter to Home Capital Group’s board of directors alleging a pattern of falsified documents (such as income statements and letters verifying employment). Those 45 brokers who were fired had brought in almost $1 billion in new loans the year before. While that’s not a whole lot of money given the size of the Canadian mortgage industry ($1.3 trillion), $1 billion is a lot of lending — and a lot of money to lose should the borrowers not be able to make their payments.

Other sources verify the scale of the fraud. Equifax, one of the two major credit bureaus in Canada, reported that it has flagged about $1 billion of attempts to commit mortgage fraud since 2013 among the lenders who use the bureau to verify borrower information. Canada Guaranty, a major mortgage insurer, reported in a 2012 presentation that about 10 percent of all mortgage applications contain some sort of fraud.

One reason why this is going under the radar at such a considerable rate is that experts refer to this as “fraud for shelter” or “soft fraud.” The people who are submitting the fraudulent applications, by and large, really want to own a home and make mortgage payments each month, but they cannot quite earn qualification for a conventional home loan. Sometimes it involves people trying to purchase a home that they could qualify for with a larger down payment and at a higher interest rate. However, they alter their bank account statements and their income verification documents so they can get the cheapest mortgage available on the market. Other, more elaborate schemes involve falsified employment letters that brokers submit to a spectrum of lenders to find the best deal for their clients.

If you’re having an initial consultation with a mortgage broker, and the broker tells you about some up-front fees, that’s a potential sign that fraud may be in the works. Reputable brokers get paid by the lender when the deal closes. However, brokers have started a cottage industry of false documents (pay stubs, tax documents and bank documents). Then, when clients go back for renewal on the loans that were funded with those false documents, the fees can be significant.

On the broker’s end, a client who comes in with a pristine mortgage application can raise eyebrows, because even the most blue-chip clients often forget to bring a document or two to the first meeting and have to be reminded to send the rest in.

The fraud isn’t just in the alternative mortgage industry, though. The big banks, credit unions, monoline mortgage lenders — and even government employees — have been implicated. The Ontario Ministry of Community and Social Services found that the Family Responsibility Office (an agency charged with enforcing family court judgments) fired at least one worker after they found fake pay stubs that he had been making while on the job.

There are many factors that have pushed people toward committing these acts of fraud. The government requiring higher premiums for mortgage insurance and shorter mortgage amortization periods has not helped, because the average Canadian is now having an even harder time qualifying for a mortgage, particularly in such pricey markets as Vancouver or Toronto. The policies were designed with a good intention — to keep the industry free from the sort of meltdown that happened in the U.S. However, the rules are now pushing good people who would have qualified for financing in the past into a riskier sector of the market. Brokers who recognize that people want to make their mortgage payments and in all likelihood will be able to are helping them gain their financing fraudulently. It will be interesting to see how policy changes to meet this new challenge.

How to Evaluate Income Property

Even though real estate prices have started to tick upward in Western Canada, the fact that interest rates remain at historically low levels is bringing in some novices to the investment real estate market. Becoming a landlord can be a terrific way to lock in reliable income over time that will bring in returns in the double digits, particularly once you have paid off the mortgages on the new properties. Before you jump in, though, here are some numbers that you will want to consider. People who sign costly mortgages on investment properties before considering these can often end up in foreclosure and/or bankruptcy court.

1. The mortgage payment.

You might think that rent will cover this for you each month — and if you set the rent at the right level, it should. If you are looking at buying a property that is already tenant-occupied, then you should have that income coming in from Day 1. But what if you have to evict the tenant for non-payment? What if the tenant moves out at the end of the lease? The mortgage doesn’t pause while you find a new tenant, but you still have to make those payments. A good rule of thumb is to have six months of mortgage payments in the bank so that you have a cushion in case your tenant moves out — or just stops paying. Thanks to new changes in CHMC policy, you can count the total income from your tenant as part of your income when applying for the mortgage, but you still want to be prepared.

2. The down payment.

In many cases, Canadian lenders require a loan-to-value ratio of no more than 70 percent for investment properties. That means that you need to have 30 percent ready to put down. Obviously, your credit score, property price and existing or likely rent will also play a role in the precise amount you need to pay, but if you don’t have that saved — or access to it through another investor — then you are unlikely to receive loan approval for the investment property.

3. The cost of insurance.

One form of protection that is available to investment property owners is rent loss insurance coverage. The best practice is to buy a policy that covers a minimum of six months gross monthly rent. That way, whether you have someone move out and have a difficult time re-leasing the place, or if you have a tenant who stops paying rent, you can take advantage of that coverage rather than draining your own savings. This is an especially good idea in situations where you may have used that cushion on repairs that got out of hand in terms of expenses and don’t quite have six months’ rent in the bank for one of your properties — and you have a tenant move out at the last minute. Be sure to factor the cost of that rent loss coverage into your budget.

4. The price-to-rent ratio.

The purpose of this ratio is to compare the median rent and median home prices in a given market. To get this, divide the median house price by the median annual rent, and you’ll get the ratio. For example, when the U.S. market hit its peak in 2006, before the bottom fell out of the American housing market, this ratio was 18.46, but it slid to 11.34 by December 2010. The average over time, from 1989 to 2003, was 9.56. For consumers, the best time to buy is when the ratio is less than 15, and the best time to rent is when the ratio is over 20. If you are looking in a market that has a high price-to-rent ratio, you might want to consider a different market as you are simply not going to recoup as much of your investment because you’re having to pay more on a property that will yield less in terms of rent.

5. Cash flow.

Negative cash flow is hell for a landlord. You should set your rent so that you have enough to cover your mortgage and have a cushion for unforeseen expenses such as sudden repairs. Look carefully at your mortgage payment amount and your incoming rent. If you gamble the wrong way and lose — and if your tenant moves out — your savings can drain quickly, and you can end up heading into foreclosure.

Investor Anxiety Spreading in Canada

Investor Anxiety Spreading in Canada

Are you concerned about your portfolio? You’re far from alone. BMO InvestorLine recently performed a survey that revealed that just about everyone else is too — all told, 97 percent of investors in Canada say that thinking about investments causes them to worry.

It’s not hard to understand, if you think about it. BMO InvestorLine ran their survey in the middle of July. The European debt crisis was back in an uproar, oil had dropped below $50 per barrel, and the Chinese stock market was in the middle of a mad bear market. Today, the Greek debt in the EU is still a ticking time bomb, China has devalued its currency, and oil is now under $44, so it’s not like the problems have resolved themselves.

There were some other questions in the survey that were interesting as well.

90 percent of Canadians feel confused about the whole investment process.47 percent (50 percent of women and 43 percent of men) are worried about losing money in their portfolio.40 percent (41 percent of women and 39 percent of men) are worried about having their investments bring back a poor return.

What were people confused about when it came to investing? Here are the top three topics:

Finding a vehicle for investment that minimizes risk while still providing the best possible return (38 percent overall)Finding the right investment vehicle for their life stage and risk tolerance (25 percent overall)Knowing the right time to alter their mix of investments (23 percent overall)Choosing the best place to put their money (23 percent overall)

If you fall into the group of people who are concerned about returns, one of the best — and most underrated — investment options is real estate through the private mortgage lending market. If your investments have been under performing, consider investing in tangible real estate with double digit returns. One investor, 1 property, your decision. Contact Amansad Financial to see if private mortgage lending is for you.

Why Investing in 2nd or 3rd Mortgages behind Reverse Mortgages is Super Safe.

Why Investing in 2nd or 3rd Mortgages behind Reverse Mortgages is Super Safe

If you are looking for double digit returns on your investments but don’t want to roll the dice in the stock or commodities markets, you definitely want to consider the possibility of putting your money into residential real estate. Even if you don’t have the money on hand to fund an entire private mortgage yourself, you can invest in mortgage funds or go in jointly with several other investors to fund a loan. This method is referred to as mortgage syndication or through a Mortgage Investment Corporation (MIC). One of the safest yet overlooked types of mortgage investments that still provide double digit returns is the second or third mortgage behind a reverse mortgage.

New to mortgage investing…What is a private mortgage? There are many mortgages out there that did not come from banks or other traditional lenders. There are thousands of people in western Canada who have the means to make a mortgage payment each month, but they don’t have the credit score or verifiable income to get bank approval; so private lenders exist to fill this gap. They make more interest than the banks do, because the loans that they are extending represent a higher degree of risk. Remember — with zero risk, as with government-backed savings options, you get almost zero in terms of reward, thanks to the rock-bottom interest rates.

What is a second or third mortgage? When people have equity in a house but still have some of their primary mortgage due, they may take out a second mortgage, or even a third one, for a number of reasons. They might want to make some major renovations on their home in order to boost the value. They might want to buy a vacation home with cash. They might want to take that 40th anniversary cruise in the Mediterranean Sea and spend as much money as they want. They might have a major medical expenditure come up — or they might need to send a child off to college. If the house goes into foreclosure, or if the owners put the home up for sale, the proceeds have to satisfy the first mortgage before the second mortgage holder gets paid.

Just in case you’re thinking that a second mortgage sounds like a risky investment, though, there is an important difference between funding a second mortgage behind a reverse mortgage as opposed to a traditional first mortgage. With a reverse mortgage, the homeowner (often a senior citizen) has equity in the home that could be as high as 100 percent. However, the homeowner now wants or needs some of the money back out of that house, and so they go to the bank and ask for the process to begin. The application is much less onerous than taking out a traditional mortgage is, because the asset’s value itself is the determining factor, rather than the credit profile of the borrower. The homeowner can make payments each month, quarter or year to cover some of the interest expense, but payments and loan amounts are set up so that the homeowner never owes any money to the bank unless he moves out of the house or wants to sell it. Upon the death of the homeowner, any remaining debts come out of the estate.

With a reverse mortgage, since no payments are required while the homeowner is alive, there’s no way for that loan to go into foreclosure — default is impossible. So if you are willing to fund a second or third mortgage behind a reverse mortgage, you can still charge the double digit rates that are common with second or third mortgages, particularly in the private mortgage market. However, because the homeowner isn’t having to make any payments out of pocket on that first loan, he should have more money in hand to make monthly payments to you — and so the risk will go down.

Just as with any investment, you will want to perform your due diligence before funding anything. However, it’s important to remember that because the vast majority of these borrowers are senior citizens, they are more likely to be wise with their money. They don’t want to run up credit accounts, and it’s possible to set up payment arrangements so that they are consistent with any interest payments that they are making to the reverse mortgage holder.

What goes into your due diligence? In private mortgages, the value of the asset is the most important piece of information. So you’ll want to get an accurate statement of the current equity remaining in the home. However, you’ll still want to look at the borrower’s ability to make payments and credit history. Many senior citizens have retired and may not have a monthly income, but they instead plan to pay on the basis of pension income and/or interest income from investments. You’ll want to take a look at their financial situation to make sure that they can meet this new obligation in their budget. You’ll also want to make sure that the amount they are requesting is not more than the amount that the home’s equity is worth — in fact, with reverse mortgages in Canada the equity protection is built into the 1st lenders advance parameters. The maximum allowed in a second position mortgage with a reverse mortgage is 65%. Can you really be more secure than that as a private 2nd mortgage holder? It is possible, but difficult to find.

So how do you get started? Amansad Financial has connections with a number of different home owners currently in a reverse mortgage who are looking for additional equity cash through a second or third mortgage. We can provide you with profiles of several different potential borrowers so that you find someone with whom you are compatible. If you don’t have enough to fund an entire mortgage by yourself, we can match you with other investors who are looking to go in with other lenders to fund a mortgage together. That way you’re in charge — you select the person with the type of home and equity profile that you think makes sense — and you can choose a borrower with a credit profile and income history that you think will make the best investment. We stand ready to give you some advice and perspective on what to look for in a credit profile and in an asset inventory so that you know that default is as unlikely as possible. Give one of our private lending professionals a call today — and we can get you started on the road to big profits!

What to Expect When Investing in Private Mortgages

What to Expect When Investing in Private Mortgages

For individuals seeking to add to their investment portfolio, a mortgage might seem like the last thing they want to consider. From the individual perspective, a mortgage is something to pay off over multiple decades after going through several loan renewals. However, the mortgage is one of the most common investment vehicles in the world — just not as a part of individual portfolios. From the perspective of banks, of course, or other lending institutions, the mortgage is one of the most popular moneymakers. It brings in a decent return on the initial investment, and it also has a lower financial risk than many of the other alternatives out there.

If you’re an individual or you own a company that is looking to diversify its investment holdings, then it’s time to consider the private mortgage field. There are many different sorts of mortgages, but the most common targets for private mortgage investors are first and second mortgages taken out against property. A first mortgage is the initial lien on a property and must be satisfied from proceeds of the sale of the property before any other claim can be honored. A second mortgage also has value but the holder must wait until the first mortgage has been satisfied in full. The difference between the first and second has to do with the date of registration. If a property already has a first mortgage, the next one to be taken out is the second mortgage. If you are financing a second mortgage, you can ask for a higher interest rate, because there is a higher risk that you will go unpaid at renewal or the point of sale, because the first one has to be paid first.

You might be wondering why you would want to invest in a market that, if you’re looking in the financial papers, only returns between 3 and 5 percent — the rates of existing mortgages offered by banks. The good news is that you’re not offering those mortgages — you’re not competing with banks. Instead, you are lending to people who can’t qualify for bank financing — but still have the means to pay a mortgage off. The private mortgage market is aimed at people who have some significant credit issues in their past keeping their scores too low for the banks to approve financing, or at people who lack the documented income history to justify a bank extending a loan to them.

Here are two examples of typical private mortgage clients. One is a surgeon who, four years ago, went into private practice with two partners. While his salary before that was paid by the hospital that employed him, his practice has paid his salary the past four years. The first year things were somewhat irregular as the business was building, but the three years since then have been much more lucrative. However, the fact that the surgeon owns his own business raises a red flag with many lenders. Self-employed professionals don’t have the same oversight in their payroll departments — at least according to the calculations that banks use to determine creditworthiness — and so the banks aren’t approving the surgeon’s mortgage, even though he has 30 percent to put down.

Another would be an English professor at a local university. Her salary is modest but more than adequate to fund the mortgage payments that she wants to take out. She also has 25 percent of the purchase price saved up. Unfortunately, five years ago, her now ex-husband ruined the family finances, letting not one but two different cars go into repossession, and he maxed out their credit cards before running off with a girlfriend, leaving her to pick up the pieces — financially as well as emotionally. A lot of those joint credit issues are still on her profile, even though she has been divorced for four years. She has found a home she wants to purchase, and she has the means to pay for it, but her credit score is still so low — and the house puts her close to the highest debt-to-income parameters that the bank permits — that she can’t get approval.

Both of these potential borrowers have hefty down payments to put down, but they can’t qualify for bank financing. This makes them ideal borrowers in a private mortgage. As a private mortgage lender, you’re more interested in the property under consideration than the creditworthiness of the borrower anyway. You know that you’re taking on a higher level of risk because you’re dealing with people that the banks won’t work with. So your primary concern is the property itself. Let’s say that a borrower wants to purchase a house listed at $600,000 and has $150,000 to put down, leaving $450,000 for the lender to fund. An appraisal reports that the house is actually worth $615,000 — so the purchase price is actually a good deal. You don’t have any problem extending this loan, because you know that if you had to foreclose on the house and sell it, you’d be almost assured of making your money back and then some, because the likelihood of the real estate market tanking to that degree over the course of a private loan is fairly small.

Of course, you still will want to look at the borrower’s financial profile — you’re just not giving it as much weight as the banks do. You’re looking at things like the credit score, the borrower’s work profile and the cash flow that the borrower has in place. Those details help you decide where to set the interest rate — and the ideal loan-to-value ratio of the investment overall. If your private mortgage is a second lien, you can currently ask between 9 and 18 percent as an interest rate. On a first note, you can ask between 7 and 12 percent — both significantly higher than what the banks would ask.

When you first slide your foot into the private mortgage investing pool, you might be looking for the safest private mortgage possible. So your ideal client might be the professor who has built up a solid work history but just has that messy divorce and financial chaos in her reasonably distant past. Because the surgeon doesn’t have any other employer than himself, you could likely get away with asking for a higher interest rate for his loan. Either way, though, be prepared to take a more active role in collecting your payments than you would if you were a bank. You might need to send out a reminder a week or so before the due date. In some cases, the client can turn out to be an unpleasant surprise — if it turns out that the professor has a nasty cocaine habit and has been using a trust fund to pay a meager rent until she can qualify for your loan, and now the trust fund is dry and she isn’t making her payments to you, you may need to hire an attorney and go through foreclosure proceedings.

In most cases, though, even private mortgage borrowers pay off their notes with little or no fuss on your part. After all, the typical term of a private loan is short — no more than one to two years in most cases — and people who take out private mortgages are often motivated to build a credit history and/or repair a poor credit score from the past. Also, people are least likely to run into default on their mortgage payments because their home is their greatest source of security. As long as you are mentally prepared for the fact that some irregularity may ensue with the payments, then you’re ready to consider the private mortgage investment market.

So how do you determine the balance between risk and reward as a private mortgage investor? You may have a mortgage broker suggesting a particular rate to you. However, the broker is not putting his own money at hazard — he’s suggesting that you do it with yours. This means that it is your job to carry out the due diligence that is necessary to eliminate as much risk as possible. This means that you’ll want to peruse the potential borrower’s credit history, employment history and all of the other documentation that he has submitted to the broker for consideration. If you do this research well, you’ll end up with an investment that has a little more risk than government-backed securities but less risk that the stock or commodities market. If anything looks fishy on the client application, though, feel free to say no — and to ask for the next application. A good broker will perform an assessment of your investment wants and needs to match you with risk profiles that are compatible, but the final answer is yours to give. You’re the one who will be drawing the profits — and bearing the loss should things go south.

You might believe that bank-based investments are enough to guarantee your solvency during retirement. If you go by the Rule of 72, you know that an investment returning 3 percent will take 24 years (3 x 24 = 72) to double in value. The risk is nil, but the rate of return is hard to distinguish from annual inflation — which makes it a poor use of your money. The other end of the spectrum of investment risk can be enticing, as commodities and stocks can double your money as quickly as a year — or even faster. However, that extremely high level of reward comes with an extremely high level of risk. If you have a savings account in a bank and the bank collapses, the government insures your account, ensuring that you retain your money. However, if you are investing in commodities, stocks, bonds or futures, there is no such protection in place for you. If the value plummets, so do your holdings.

If you have $100,000 to invest in a private mortgage, though, it’s natural that you’d be concerned about putting that money in just one loan. If you choose the wrong borrower, even after you perform all of that due diligence, you could end up out a lot of that money, particularly if attorneys’ fees eat up a lot of your proceeds and you have to accept a short sale (a sale of the house for less than the amount still owed on it).

The good news is that there are several ways to manage your risk. You can have your money invested in several mortgages instead of one. So instead of funding one (or part of one) mortgage with your $100,000, you could ask the broker to invest $25,000 each in four different mortgages. That way, even if one mortgage goes into default, the other three should continue to pay reliably. Most people who are entering the private mortgage market as smaller investors prefer this approach. Some investors — even the larger ones — take part in a mortgage pooling arrangement or a syndicate. This spreads your money out over a wide group of mortgages — or even across multiple lenders, depending on how much you invest. While this is likely to lower your return a bit, as you’ll have a mix of lower-risk private mortgages along with the higher-risk ones, you’re also securing your return to a greater degree.

Another important step involves choosing the right broker. There are many different companies in the mortgage brokerage industry, and as one might expect, there is a wide variety of quality and reliability. Before you agree to take a look at any applications, make a list of questions to pose to your broker, and ask all of them. If your broker gets impatient or hedges on any of the answers, it’s time to move onto the next broker. You’re about to invest a lot of your money, and you have the right to have all of your questions asked and your concerns addressed before you even think about getting your cheque book out.

So here’s how the process works with Amansad Financial Services once you set up as a lender.

1. You will be sent documents about a potential investment opportunity. This will include the borrower’s mortgage application and credit report as well as the appraisal on the property, a sales agreement (if a purchase), mortgage statements (if a refinance or cash take out), other applicable supporting documents. Use these documents to determine whether or not the mortgage is right for you. Once again, feel free to contact the us with any questions you have about the deal. Amansad Generally attempts to have all the questions answered within the submission package.
2. You’ll want to move quickly with your review of the application, because brokers want to be able to respond to the borrower within 24 to 48 hours. Homes for sale can disappear as soon as an owner accepts an offer, and we don’t want to lose business because a borrower is waiting for an approval. Also, some borrowers need money quickly in order to refinance existing mortgage or take out equity from existing property.This is why you should be able to expect the broker to answer your questions quickly — and completely.
3. Let us know whether you are approving or denying the loan. If approving the loan, indicate how you plan to bring the funds to your chosen solicitor. Amansad Financial Services will prepare the commitment and appropriate disclosures to be signed by both the lender and the borrowers. Once all parties have signed the appropriate paperwork, we will prepare the mortgage for instruction to your chosen Solicitor. (Note: If you do not have a chosen legal representative; Amansad Financial has relationships with various solicitors that understand our process so that the transaction is handled quickly and efficiently.)
4. The attorneys will handle all of the administrative tasks related to the title of the property — and will send you your money, if your broker offers a service of post-dated cheques. Once you’ve invested in one private mortgage, others will be less stressful and go more smoothly.It is our task to make sure that all of your questions are answered and to ensure that the loan follows all of the legal requirements in Canada.

Amansad Financial Services is registered under DLC Brokers For Life Inc., which is an Intermediary Mortgage Brokerage. We do not representing the lender or the borrower. Neither are considered clients. Both are CUSTOMERS. We will facilitate the mortgage deal by gathering information, explaining the options, completing the necessary documents and keeping both sides apprised of the deal’s progress.

Call 780-756-1119 or 1-877-756-1119 to discuss.

A Letter of Calling for Rent-to-Own, Lease Option, and New Investors

A Letter of Calling for Rent-to-Own, Lease Option, and New Investors

Amansad Financial specializes in private and alternative lending we see a great degree of varying borrowers and lenders. Some Applicants may have excellent credit but simply do not meet a traditional lenders guidelines with respect to income verification, time on the job, or have not distanced themselves enough from a prior bankruptcy, consumer proposal, or other out of character credit mishap. Other times, it may be an applicant that has the income, the job stability, and down payment… however their credit is brutal. It could be caused from a variety of reasons, but I must tell you I have seen it all.

Private and Alternative Lending has always provided much more satisfaction when a real estate solution is provided that was not founded by a applicants bank, or their past broker. However there is one borrower is being neglected. This borrower has below average credit, above average income, and has the middle of the road down payment (10-15%). Can’t get a traditional mortgage & not enough for an equity based private mortgage. Now you may ask “How is it possible that one can save 10-15%, but is unable to get a bad credit mortgage?” It happens more often than not. Well, Amansad Financial Services currently has fair network of investors that will provide second mortgages to 90% LTV, however the borrower demand outweighs the supply of investors. Many of these investors are in the Rent-to-Own and Lease Option arena.

We have heard over and over again from various Investors that they are tapped out, and require a JV in order to make their Rent-to-Own / Lease Option deals fly. We have also received feedback that they may also be capped out on the number of rental investment properties they can hold; a very good problem to have. Another common vexation is the 25% or greater down payment that is being required.

Now if you are a RTO/LTO Investor, you will be ecstatic if the tenant buyer has 10% option consideration, satisfied if they have 5%, and may even consider if the tenant buyer has 3%. As for the predatory companies that do it for less I must say shame on you. The latter is a recipe for disaster.

Now what if you had the opportunity to invest in a second mortgage that potentially provided you with an annual return of 18-20%, while only investing 10 percent of the purchase price/appraised value. Would you consider it? Would you do it? What if the borrowers had an excellent exit strategy?
Let’s look at the simplified numbers. Numbers may vary depending on the structure of the LTO agreement.

RTO/LTO Sample:
$500,000 Purchase Price
$125,000 = Investor Down Payment
= $375,000 Mortgage @ 3% with a 30 year amortization
$1200 – Estimated Investor Legal Fees
$126,200 = Total Cash to Close for Investor
$25,000 Option Consideration from Tenant Buyer
36 month term w/ 3% appreciation
$4000 Estimated Annual property taxes
$1500 home insurance

Projected Overall Profit at 36 months = $96,206
(Assumes the home sells for the contract value)
Projected Profit is with a 50/50 JV = $48,103

How let’s assume the same $126,200 was invested in second mortgages at 16% -20% with borrowers that were investing 10-15% of their own money. Would this be a more secure investment? Well a simplified example would look like so:

2nd Mortgage Sample:
$126,200 x 16% = $20,192/yr. = $60,576 over 36 months
$126,200 x 17% = $21,454/yr. = $64,362 over 36 months
$126,200 x 18% = $22,716/yr. = $68,148 over 36 months
$126,200 x 19% = $23,978/yr. = $71,934 over 36 months
$126,200 x 20% = $25,240/yr. = $75,720 over 36 months

Note: The interest rate calculation above is based on interest only, compounded monthly

Both scenarios are lucrative, however Amansad Financial Services will agree that the 2nd mortgage is a better option for many reasons. The most obvious reasons are; there is no need for a JV, no landlord tenancy disputes, no mortgage insurer disputes, the return is not heavily weighted on property appreciation, and the mortgage applicant tends to be more qualified than the tenant buyer.

Both situations will have varying tax implication depending on how you invest and we suggest that you consult with an accountant. In addition, seeking Independent Legal Advice is recommended. Amansad Financial has many connected Lawyers that we can direct to you for some real estate law guidance.

Amansad Financial Services does not do any mortgage syndication, and we match one investor/lender with one property. You will always decide what works best for you. If you or anyone you know may be interested in investing in second mortgages, call 1-877-756-1119 or click HERE and complete the quick link investor form.

Real Estate Investor Mortgage Loan

Connecting Real Estate Investors with Mortgage Loans

Creating a solid investment portfolio requires a commitment to diversity among your investments. You definitely want your emergency cash stashed in the most liquid forms available — a combination of savings, money market and certificate of deposit options. The interest rates on these investment vehicles are not much at all, but the money is secure — and it’s there if you need it. If you have to take it out, you’re not assuming any fees for early withdrawal, and you’re not missing out on a lot of interest income while you pay yourself back.

At the other end of your risk spectrum, you want mutual funds that pursue aggressive returns as well as some stocks. However, you also want some items in the middle, when it comes to risk and reward. This type of investment beats the pants off the returns from a savings account but does not come with the same risk as the stock market. This is where real estate investment comes into play. You might think that real estate investment isn’t that great a deal — after all, being a landlord is almost like taking on a second job at times — but if you decide to invest in real estate as a lender, then things change dramatically.

Why should you fund someone else’s mortgage? Aren’t mortgage rates rock-bottom too? That’s true, but you aren’t going to make 3, 4 or 5 percent on these notes. You might make 8, 10 or 12 percent. The people whose mortgages you would be funding can’t qualify through bank financing. The banks want a hefty down payment (which you would want as well), but they also look at income verification and credit history. People who don’t have third-party verification of a solid level of income or a credit score that meets the bank’s approval don’t get the loans they want.

But why would you want to lend to people whom the banks won’t touch? Well, in a lot of situations you wouldn’t. If someone only has 5 percent to put down, has a terrible credit score and has bounced around from job to job, that person is going to be renting for a long time. He hasn’t put together a track record that shows he is worthy of a loan of the size that would allow him to purchase a house.

However, consider the example of a dentist who opened his own practice a year ago. Before that, he was a partner in successful practice, but he decided to go on his own. He moved to a new city, so he didn’t take patients with him to form a base for operation. Instead, he relied on marketing to build a new clientele, and he relied on his savings to cover his living expenses until the practice became profitable enough to fund itself and start bringing him income.

If he goes to the bank and wants a mortgage, even if he has the expected 20 percent to put down for a conventional loan, and even if he has a stellar credit score, his income over the past year is spotty at best. He may not have taken any salary at all for the first six to nine months, living off his savings and pouring all of the business revenue back into marketing and bringing in customers. He will have a difficult time convincing the bank to lend him money. But if his financials are secure and his patient rolls are full, why wouldn’t you lend to him? He’s a solid bet to pay you that higher interest rate for a couple of years as he establishes an income history from his practice and lines up a bank loan to replace yours. You get your principal back, as well as a couple years’ worth of returns between 8 and 12 percent.

This type of borrower is the client that Amansad Financial helps frequently with finding a home loan. As an investor, you can profit handsomely over the short term from clients like this one, but it’s also a “win” for him, because he can go ahead and start building equity instead of sinking money for two more years into rent. Amansad Financial specializes in linking potential investors and borrowers, so that both parties benefit. There are many potential borrowers like this dentist out there, and if you are an investor who can fund a mortgage, Amansad Financial is looking to work with you as well.

Invest Commercial Real Estate

Keys for Investing in Commercial Real Estate

Throughout Canada, real estate prices plummeted in the wake of the real estate collapse of 2008 and 2009. While prices have started to rebound a bit in 2014 and the first part of 2015, they still sit well below their 2007 values, which means that there are a number of investment opportunities out there for someone with the savvy and resources to take advantage of the dips that remain in the market. For example, even when the credit crisis of 2008 was at its worst, when Marcus & Millichap Real Estate Investment Services surveyed over 1,000 commercial real estate investors, 51 percent planned to increase their commercial holdings. The downturn in 2008 and 2009 was very real, but downturns are part of cycles, and investors with the patience to take advantage of an entire cycle get the benefit of increases in values as well — particularly if they buy in when prices are low.

Not all commercial real estate deals are the same, of course. Frequently, the first deal that pops up turns out to be readily available for a reason, as the property is a dud, or the property is beautiful but it’s located right next to a water treatment facility. Take a look at some of these tips that the pros in commercial real estate use to their advantage.

1. Learn to think like an expert.

You might never have invested in commercial real estate before, but that doesn’t mean that you can’t develop the mental habits to think like one. A key difference between residential and commercial real estate is that commercial properties are valued on the basis of their usable square footage. Commercial real estate brings in a larger cash flow than residential does because less space goes to waste. This is why multi-unit properties bring in more cash than single-family dwellings, and why commercial properties bring in even more. If you own a retail center, you have more tenants (and more value) per square foot. Fixed items like utility connections, restrooms and other amenities that take up more space per person in a home take up less proportional room in a commercial space. Also, commercial leases tend to last longer than residential ones, which means that your cash flow is secure for a longer period of time. Finally, remember that you need 30 percent down in many cases before a commercial lender will approve a loan.

2. Establish your limits.

Before you get caught up in the emotional excitement of a lucrative deal, have some facts in hand. What is the most that you can afford to join in the deal? What is the realistic profit you expect to bring in as a result? Who are the most important people in the deal? What is the existing occupation rate? How many empty spaces are there in the commercial property? These are all questions that influence the profitability — and advisability — of the deal.

3. Know a good deal from a dud.

The most savvy commercial real estate investors can walk into a building and determine whether the deal makes sense or not. Remember that you should always reserve the right to walk away from a deal that stops making sense. If you have a gorgeous building in a prime location, but the inspection reveals key structural flaws in the building, it’s time to start looking for a different opportunity. Look around for the sort of damage that is going to require significant repairs; in a commercial space this would include things like ceiling tiles that have turned brown with moisture; cracks around door and window frames or along walls, signifying foundation trouble that will run into five or six figures to fix; soft areas in the floor, even in out-of-the-way spaces like closets or employee restrooms. Keep that calculator on hand so that you can easily determine whether a property fits within your financial parameters or not.

4. Find the right broker.

Canada is filled with brokers looking to make a commission from connecting commercial real estate investors with opportunities. However, a lot of these brokers live hundreds or thousands of miles from the opportunities they represent, and they don’t have a significant relationship with lenders in the area or with realtors who can help you find the right property. Amansad Financial is based in western Canada and has relationships with lenders and realtors all over this part of the country to give you expert advice about the places where you want to invest. A lot of the competition uses tools like the city-data.com to spout information your way; Amansad Financial has the expertise and relationships to get you the best deal throughout Alberta, BC and the rest of western Canada.

Buy Let Property Investment

Buy Let Property Investment

Buy to Let Mortgage Tips

The volatility of the stock market and the continuing trends of low interest rates are making buy-to-let investments an attractive addition to an investment portfolio. A share of stock in a company can take a leap in value but can also plummet disastrously. A home’s value can also rise and fall, but its performance will generally mirror that of a blue-chip stock, gradually moving upward in value over the long term. It is true that home prices took a major hit after the housing collapse of 2008, but that type of movement is much less common than the gradual increase, and those who are able to hold onto their properties long enough are likely to see their values recover and then exceed their 2007 levels — if they haven’t done so already.

If you have considered adding a buy-to-let property to your portfolio, though, there are some things to consider. You can make a lot of money through these investment vehicles, but only if you do them the right way, and if you are prepared for some hiccups that can arise along the way.

First of all, remember to read the fine print before you go to closing. Different lenders have different fee structures for their loans. Larger banks are not likely to charge a significantly higher interest rate on the loan than they would for a primary residence mortgage, but pay close attention to those fees. Whether they are flat amounts or percentages of the loan, take bids from three or four lenders — and let them know you’re shopping around — to get the best deal for your note.

It is also important to compare the value of this investment with what you could get out of the same money in other types of investments. After all, you are risking tying up money in a property that could drop in value, even if you are bringing in rental income each month. If you can find a mutual fund that brings in 8 to 10 percent annually each year, for example, that is definitely something worth considering. The best use for a rental property is to add diversity to a portfolio that is already humming along, rather than starting your portfolio that way.

Another important consideration is the area where you purchase your buy-to-let property. Different parts of the same city obviously perform differently, but realtors and savvy investors know the areas that are slightly undervalued and where you can swoop in and get a deal. Finding a realtor who is an expert in investment properties is a definite must, but common sense can also rule out some areas for you. Just because a property is cheap does not mean it is a solid investment. After all, it might be in a terrible part of town, it might be sitting on a cracked foundation, and it might have black mold that the owner knows about but you don’t. Work within your budget, but also find the types of properties where reliable tenants will want to live.

Setting the rent at the right amount is crucial. You’ll have to research rents in the area to make yours competitive, and then find a mortgage that allows the rent to sit between 125% and 130% of your mortgage payment. This lets you pay your property taxes and insurance while squirreling away a small amount for maintenance and repairs. Don’t skimp when it comes to buying that homeowner’s warranty, either, because it’s a lot cheaper than replacing things like the air conditioner, the furnace and the hot water heater yourself.

Don’t be reluctant to purchase a property that is a good drive from where you live. Even if it’s another suburb or another part of your city, you can often find properties that are about to hit a “boom” and increase in value — and where young families are starting to move. These are often the best tenants because they are ambitious about building savings and buying a house, even though they aren’t quite financially ready to do so yet.

Finally, don’t be afraid to say no to a deal that seems fishy. Sometimes people are in a hurry to jump right into investing in real estate and take the first property that seems minimally promising. However, sometimes those homes pop up for a reason, turning into white elephants over time. Do your due diligence to get the right property for your needs.

Real Estate Investing Article

Real Estate Investing Article

A lot of people look at real estate as a great way to start socking away a reliable investment and either have tenants pay their mortgages for them, or “flip” the house and turn a profit. As with any type of investment, there are advantages and drawbacks. If you are considering making the move into real estate investment, here are some tips to help you find your way.

Tips for New Real Estate Investors

1. Establish a relationship with a local experienced realtor who invests in real estate personally. While all realtors might claim to be experts on investing in real estate, those who have put their own money into the game know the good, the bad and the ugly factors on a more detailed level. Having that type of experience in your corner is a real bonus.

2. Never purchase an investment home without having a professional, licensed home inspector take a look at it first. You might be tempted to take on a property at a rock-bottom price, but in the final analysis, you can end up spending a fortune getting a property up to code or making repairs that your tenants (or buyers in a “flip”) demand. Paying a couple hundred dollars for a quality inspection can make the difference between profit and significant losses.

3. Focus on properties that will bring in a positive cash flow. When setting rent, you should get enough to pay the utilities, mortgage, property taxes, and insurance, as well as a 10 percent cushion to set aside for repairs which will come up. This is difficult to find in many metropolitan areas, but outside the major cities this is easier to come by, so be flexible with your search criteria when it comes to location.

4. Sit down with your banker or with a reputable mortgage broker and take a look at your finances, including your current budget. Get a reasoned perspective on the amount that you can reasonably afford to take on through a mortgage to fund your investment.

5. Even if you’re going in with your best friend from high school to buy an investment property, complete a formal agreement to cement your partnership or joint venture. Sometimes friendships are ruined when these sorts of ventures do not end up like either partner had planned. Include specific provisions for cases like the death of one partner, the decision by one partner to sell even though the other partner does not want to, or if one partner fails to pay his proper share of the expenses. Having those items in writing keeps the relationship professional and does not threaten your personal connection.

6. Remember that, while time is often money, do not sign on the dotted line on an investment that does not end up making sense. There’s no reason to stick with a deal if you don’t think it works for you any more. Don’t let the fact that you spent hours on it force you to execute a transaction that you know will be a loser.

7. Unless you are a professional handyman, hire a firm with property management expertise if you plan on investing as a landlord. Let this company screen your potential tenants and handle repairs, maintenance and any other issues that the tenants might bring up. This way, if a pipe bursts in the middle of the night, you won’t be the one getting that angry telephone call. Plan to spend about $100 per property each month for this level of service.

8. Remember that when you buy and sell real estate quickly, the Canada Revenue Agency views your profits as business business income, which means that those profits will be taxed. If you have the “flip” deal of a lifetime lined up, that’s fine, but remember that purchasing properties for the long haul is preferable, as long as they are properties that you can reasonably rent out as the tenants end up funding your mortgage, allowing you to develop equity. If you sell a house that you have owned for several years at a profit, you’ll have an easier time classifying the profit income as capital gains, which has half the tax rate as business income.

9. Finally, keep accurate records of all expenses and income for the investment property. Keep this separate from your personal financial statements and bank account, as this will muddy the waters when it is time to file taxes at the end of the year.

Daniel K. Akowuah | Mortgage Professional / DLG Underwriter
Toll Free: 1(877)756-1119 | PH:1(780)756-1119 | FX:1(877)238-7794
 DLC Brokers for Life Inc. (Brokerage) - 2nd Floor, 5303 91st Edmonton, AB T6E 6E2

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