Investor's Guide

Investing In Mortgages

Become Involved

Investors in private mortgages must be willing to take risks. For example:

• They must be willing to become involved in the investment process and must know what their tolerance to risk is.
• They should not simply rely on the recommendation of a lawyer, a real estate agent, or a mortgage broker when entering into a transaction.
• They should fully understand what they are getting involved in before they agree to invest their money in any transaction.

Unfamiliar With Mortgage Financing

Investors must choose what sort of real estate they are willing to finance because this real estate will be the security of their investment. For those unfamiliar with mortgage financing, it would be prudent to invest only in residential or recreational properties. Making an investment in a commercial transaction, can be much more complicated and much riskier.  A good rule of thumb is to:

• Invest only in a geographical area that you are familiar with.
• Visit the property before you decide to make your investment.

Determined By Risk

Yields on mortgage investments will be determined by risk. The higher the risk, the higher the yield. In todays market you can expect a yield of 10% to 13% for a moderate level of risk. Minimum investments of $10,000 are required for private mortgages.

Private Funds

The typical borrower who needs private financing:

• would be a self employed individual or someone who may have had a bad credit history in the past,
• may have a substantial cash down payment available but doesn't meet the stringent underwriting criteria of the banks

Cottages, are another area where private funds are used. The banks shy away from properties that are not inhabitable year round, but if you are familiar with the area you may not have a problem making such an investment.

Earn Interest Income

Private mortgages can also be held in a self directed RRSP. Mortgages are an ideal RRSP investment because they earn interest income that can be sheltered within the RRSP. If you were to invest in a mortgage outside of your RRSP, your interest income would be taxed at your full marginal tax rate, thus lessening the benefit of your investment.

Rewarding Form of Investment

In summary, private mortgages can be a very rewarding form of investment, but they are very much a hands on investment. You must be willing to take the responsibility, to choose the investment that meets your needs and your tolerance to risk.