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Private Mortgage Investments as a Real Estate Alternative

A miniature house model on a desk with a calculator, pen, and financial documents in the background, emphasizing real estate or financial planning.

Increasingly, investors are discovering traditional avenues are no longer the sole pathway to success. This includes finding alternatives to conventional real estate ventures, such as becoming landlords, offering short-term rentals, or flipping properties, especially as regulations and policies make some of these options less lucrative.  

Many investors are turning to private mortgage investing as a compelling alternative. Whole mortgage investments involve lending money directly to individuals, with borrowers’ real estate serving as collateral. Unlike direct real estate ownership, private mortgage investing offers distinct advantages.

Chris Baker, Vice President, Investment Sales at CMI Mortgage Investments notes that investors need a certain amount of liquidity to participate in whole mortgage investing: “Because of the nature of the  loans – lending enough for a real estate transaction or refinance and the large price tag that carries – we recommend investors have a minimum of $1,500,000 in liquid capital, although there are mortgage investment funds that cater to investors with less than that.”

For those who are unable to commit to minimum investment limits for whole mortgage programs, MIC funds are available, where investors pool their resources to fund lending.

Rising Demand for Private Mortgage Investments

The Canadian real estate market has witnessed a surge in private mortgage investments, reflecting evolving investor preferences and addressing shifting market needs. As higher numbers of borrowers are seeking alternative solutions for their mortgages, there are greater opportunities for investors in this largely untapped niche. Private mortgage investors fill the gaps left when potential borrowers do not qualify for bank or credit union mortgage loans.

Many investors are seeking alternatives to their current real estate venture strategies, as changing regulations and policies impact them. A whole mortgage investment program, funding mortgages to those who need alternative lending sources, offers a reliable and significant income for these investors.

As Chris Baker points out, “Private mortgages are filling key needs in the traditional real estate market, helping borrowers take advantage of real estate opportunities, and helping the investors who fund them benefit from the real estate market in a unique way. It gives investors the advantages of being active in real estate without many of the challenges.” 

Using Private Mortgages to Diversify Instead of Real Estate

Private mortgage investments allow a similar diversification to real estate. However, unlike direct property ownership, these investments are backed by real estate assets, to enhance the security of the investment. This allows private mortgages to offer many of the same diversification benefits that traditional real estate investments do, while allowing investors to leverage Canada’s strong historical record of reliable mortgage repayments. 

Private mortgage investments also offer some additional benefits, especially given current market challenges with market volatility and inflation. Traditional portfolio strategies face challenges in managing risks and generating adequate returns. Private mortgages allow investors to enjoy the benefits of real estate diversification without these challenges.

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Private Mortgage Resilience vs. Physical Real Estate for Addressing Market Challenges and Risks 

While real estate has traditionally been a stable investment, there are challenges affecting profitability and increasing elements of uncertainty. Beyond standard expenses such as insurance, mortgage payments, and utilities, property owners encounter significant costs for repairs and maintenance. These expenses are particularly burdensome given increasing costs of living.

Vacancies present another hurdle, disrupting cash flow and requiring resources to attract new tenants. Extended vacancy periods can strain finances and decrease overall profitability. Additionally, tenant management can be time-consuming and complex, involving tasks such as screening applicants, resolving disputes, and ensuring regulatory compliance.

Liquidity risks further compound the challenges associated with real estate ownership in today’s market environment. Current market volatility can lead to drops in property values, making it challenging to sell assets at favourable prices. Tightening credit conditions may limit access to financing, hindering investors’ ability to leverage their assets or acquire new properties. Additionally, economic uncertainty and changing consumer preferences can prolong the time properties spend on the market, further reducing liquidity, and potentially tying an investor to a liability.

Because of current market dynamics, including rising interest rates, fluctuations in property values, and evolving housing regulations and policies, real estate ownership has become less reliable. Property owners can face cash-flow negativity due to these interest rate increases, while declining home prices have intensified financial pressures. Historically, low interest rates and increasing property values mitigated risks, but this is no longer a factor. 

Together, these factors reduce the profitability and resilience of real estate investments in today’s market. Despite its potential for good returns and portfolio diversification, the increasing costs and operational demands associated with property ownership make it a less attractive investment option for many.

Private Mortgage Investment as a Solution 

Given these challenges, whole mortgage investment programs provide a more secure alternative to real estate, to avoid these issues, while at the same time allowing investors to capitalize on the changing trends that are making it harder for individuals to borrow. 

By offering flexible terms, investors can adapt to market demands and generate competitive yields in private mortgage investments. These adjustments in rates compensate for any increased risks, making these investments resilient in a dynamic real estate environment. Additionally, the short-term nature of private mortgages, typically ranging from 6 to 36 months with an average term of just 12 months, helps to further mitigate risk.

Furthermore, banks are tightening their lending criteria, creating a greater need for alternative financing, as individuals who are unable for one reason or another to qualify, but who have otherwise demonstrated reliability and an ability to repay the loan, are left unserved. Additionally, with high rents and other economic situations, more people are strongly motivated to buy real estate but may have difficulties accessing lending. 

“Borrowers tend to prioritize mortgage payments first, which can provide reassurance to lenders. What’s more, the loans are backed by real estate for added security. Many investors are turning to whole mortgage investments instead of buying properties, because they are still getting the income, from interest instead of rent, but are also getting a little more security,” notes Baker.

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Unique Benefits of Private Mortgage Investing

Private mortgage investments offer reliable income streams through regular interest payments from borrowers. This steady cash flow meets the income needs of investors. Historically, mortgage investments have generated annual returns ranging from 6% to 16%, making them an attractive proposition for income-oriented investors. The actual target yield depends on the investor’s objectives and risk tolerance. Various factors, including the borrower’s profile, location of the property, property type, mortgage type and duration, security position, loan to value, and others, impact the exact rate received. Because private mortgage investments offer greater flexibility in how lenders can set terms and rates to address greater risk, there are more options and greater control for investors to have a personalized investment.

With greater flexibility in setting terms and rates, lenders can tailor investments to meet the objectives and risk tolerance of investors. Higher interest rates associated with private mortgage investments reflect the risk profile of the borrower, offering the potential for enhanced returns via the interest repayments. Additionally, investors do not need to wait for properties to appreciate in value to provide gains, or risk market fluctuations that cause drops in value. These factors make the income dependable, with higher yield potential compared to traditional fixed-income investments.

Additionally, with the right provider, mortgage investing can be completely hands-free. Unlike the extensive time and expertise demanded by property ownership—such as the tasks of scouting viable properties, overseeing their management, engaging and retaining tenants, and various other responsibilities—mortgage investing can provide a more streamlined and less demanding investment avenue.  

Risk Mitigation

Private mortgage investments are backed by real estate, where, if a borrower defaults, the lender maintains a claim on the property, enabling potential debt recovery; however, further research and risk mitigation are still important. Thoroughly assessing creditworthiness, appraising property values, and quantifying risks to determine appropriate terms and interest rates is critical. Furthermore, legal documentation needs to be meticulously maintained. Other considerations, including insurance, should be investigated and confirmed.

With a mortgage investment company like CMI, this due diligence is handled for investors, with stringent underwriting standards to help ensure stability and potential returns. Investing in lending for multiple properties helps diversify to further mitigate risks. While investors can potentially finance mortgages on their own, it entails personally managing the entire process and all risks, from identifying opportunities and reviewing applications to handling legal matters and borrower repayments. Besides the obvious time commitment, tasks like handling appraisals and assessing borrower credibility require expertise and, if not done well, greatly increase risks. Alternatively, opting for a complete mortgage investment program offers a more attractive solution, streamlining these tasks. Investors still need to be able to provide a significant upfront capital investment, however.

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Choosing established financial service providers like CMI for access to high-quality mortgages across Canada, backed by a track record of over $2.5 billion in successful placements, can significantly reduce both time commitment and risks. The company’s in-house mortgage administration team, CMI Mortgage Services, handles all aspects of managing mortgages, including borrower correspondence, repayment management, and statement requests. They manage unexpected situations that may arise during the mortgage term, as well. Compliance teams conduct regular quality control reviews to ensure regulatory documentation is accurate and complete. With streamlined processes and integrated software, CMI provides comprehensive professional management for investors.

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