Rent Real EstateMortgages: Investment Opportunities for Canadians
Mortgages have put Canadians more than CN$ 343 billion in debt, according to Statistics Canada, but savvy investors love mortgages for their semi-annual compound interest returns and fully-secured status.
"Usually, I get a higher rate because the kind of mortgage I go into is in a situation that the banks will not lend on," explained Joseph Falcano, a private investor who estimates that mortgages represent about 50 percent of his investments. "Banks will lend on conventional residential properties, but they are not as ready to lend on a farm or a development. I am a relatively small investor so I can be very flexible."
When Falcano first began investing in mortgages he decided against being greedy and going for fast gain or big returns. Instead, he chose to be content with steady eight to ten percent compounded returns each year. If he borrowed against this own properties to raise funds to lend out as mortgages, the loan interest would be tax deductible, perhaps increasing his returns further.
Mortgage investors (known as mortgagees) have legal rights to collect on the mortgage debt if borrowers fall too far behind with payments.
"Holding mortgages is like any investment -- it takes time," said Falcano, referring to the occasional problems when someone falls behind with mortgage payments. "That"s the penalty you pay for an investment that is somewhat over the odds. If you are not prepared to work, then put your money into the bank or a GIC and get a lower return on your money -- that is a conscious trade off you make."
As with all loans there are risks -- late payments or perhaps no payments. Canadian investor rights and legal procedures regarding delinquent mortgages vary according to provincial mortgage laws. In Ontario, for example, mortgage contracts contain a clause called the Power of Sale, which gives mortgagees the right to oversee the sale of the property concerned to recover the investment and costs, usually without taking the property owner to court. In Alberta, power of sale is not used and the most common remedy is foreclosure which involves court proceedings.
"I know very few of the borrowers," Falcano said, explaining how he manages his portfolio on his laptop so he can access it when he travels. "Most of these people have their dealings with the mortgage broker. The only decisions I make are up front -- whether it looks like a good investment. It is important to be selective. I hear of maybe five or six mortgages a month, but many I will pass on as too risky."
Just as administration fees can erode returns with mutual funds and other investments, mortgage investors must monitor actual rates of returns. However, an advantage with mortgages is that borrowers cover many administration costs, including sign-up fees, appraisals and, when the mortgage is finally paid off, the discharge fee.
One downside to investing in mortgages relates to frequency and size of repayment. Investors may be faced with reinvesting small amounts of earned interest elsewhere until they can accumulate sums large enough to lend as new mortgages.
"My portfolio is sufficiently large so that monthly amounts of interest going into the account accumulate relatively quickly," explained Falcano. "As soon as interest adds up to another $25,000 or $30,000, I"ll lend that again, that way I do not have a lot of cash sitting idle. If you start with a $100,000 portfolio of mortgages and assumed an interest rate of 8% to give an income of about $764 per month (principal and interest), you must decide how to invest this until you have enough for a mortgage since this is too small an amount to make it worthwhile."
Talking to local mortgage brokers is an excellent way to see whether mortgages are the right investment for you. Residential and commercial real estate professionals should also be able to give you a feel for the types of private investor financing that are most in demand. Paperwork should always be prepared, reviewed, and approved by your attorney before you sign anything.
Understanding the real estate market is the first step in wise mortgage investing, so if you find real estate fascinating, this may be the investment for you.
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