This will be the second time we lend money as private mortgage lenders. Our first-time lending experience was pretty positive: the borrower deposited back the lent 100,000 CAD along with the profits we received over the last eight months. For our readers who may be interested in a private mortgage income stream, I will provide details about our next deal here. Information on our first experience with a private mortgage and what is important in this type of investment may be found here. Please be aware that the bank sees this type of investment as risky and may not be ready to lend to a borrower — you’ll need to determine for yourself if this is worth the risk for you. This investment offers a potential profit of 7 percent to 11 percent.

Is It Really a Risky Investment?

Let’s take a look at a real investment we are going to make. A borrower is looking to borrow money against his home in one of the cities in the Greater Vancouver area. The mortgage broker hired an independent appraiser to evaluate the home price. The appraisal report showed that the home’s market price is 2,100,000 CAD. The twenty-five-page report explains that the price given to the property was based on the following:

• Sales in the immediate and surrounding areas for this style of dwelling
• Current real estate market conditions

The bottom line is that an independent company has evaluated the house and determined its price. The property tax for the property has been paid. It has been verified by the city municipality.

The legal side of the deal is secured by a law corporation, and the borrower must pay all the related expenses. The borrower must also pay all additional expenses relevant to the deal, including the mortgage broker’s fee.

How Much Is the Owner Going to Borrow?

The borrower has a 607,648 CAD mortgage on the house, with no issues making payments on the mortgage. The mortgage broker we work with is going to lend an additional 800,000 CAD to the borrower. Out of that 800,000 CAD, our portion of the private mortgage will be 150,000 CAD. In total, the borrower will have a debt of 1,407,648 CAD. This amount is 67 percent of the house’s real value, which means the market would have to go down more than 33 percent for the borrowed money to be at risk. It is like an asset on sale for 33 percent less than its book value.

Why Is the Bank Not Ready to Lend Money to
the Borrower?

To be honest, I have no idea why the bank isn’t interested in this deal, but maybe it is because the house is still under construction. It may be because of a bureaucratic rule the bank must follow, or perhaps the 33 percent safety margin is not enough for the bank. If any bank employee familiar with mortgages is reading this post and can shed light on this puzzle, I would be happy to receive his or her comment. Although I do not understand the bank’s decision, I do see an opportunity for us to earn a juicy 10 percent profit. The analysis I provided in the previous paragraph makes me confident to invest in this deal.

After receiving some comments from our readers, we explain why banks are not ready to lend money. Banks will not lend to these types of clients because traditional lenders adhere to B-20 rules in which the emphasis is on the client’s income and credit rather than the equity or the down payment. In other words, banks are looking for a good credit score and solid income.

Mortgage brokers we work with experienced only three private mortgage deals that went to the foreclosure process, and in all of those cases the lenders got their money back with profits. Once again, let me remind you how important it is to be backed by a loyal, experienced mortgage broker when you make these deals,

What Could Go Wrong with This Investment?

The worst-case scenario here is that the borrower is unable to pay his debt and must file for bankruptcy. In this case, the house would be collected and sold. After the sale, the money would be returned to the owners of the property. All the lenders possess joint title to this property (i.e., they are the owners of the property until the whole debt is paid), and therefore, they will all receive their lent money. Of course, the procedure of collecting and selling the property may take time, but eventually, all the lenders will get their money. True, the amount the lenders get might be less than what they lent, but for this to happen, the price of the property must fall by more than 33 percent. A case in which all the money cannot be paid back to the lenders is simply impossible because the property price cannot go from 2,100,000 CAD to zero even in the case of a major disaster that destroys the home itself, the land will still hold significant value in this market. The borrower agreed to pay 10.45 percent interest—we will be collecting a nice profit.

We like the private mortgage income stream because it is almost a passive process. The nonpassive part of the process is depositing a check once a month. We will continue increasing our investments in private mortgages.