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.