• PRIVATE LENDING – WHAT YOU NEED TO KNOW – PART TWO

  • As a real estate investor I dreamed of having a horde of rental properties but with prices where they are, down payment requirements, land-lording issues in some cases and finding good deals, I turned instead to private lending.

    I liquidated my last property after completing two Rent-to-Own deals but have kept my Four-Plex as it is a JV deal that is too good to get rid of plus it keeps me in the game so to speak.

    At this point in my life, I am looking to put more focus on my retirement goals and initially I thought I could do that by having rentals, however I realized that I like the low-key approach to investing rather than looking for great deals, trying to find partners with money and chasing down tenants for rent.

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    In the first blog post I wrote about borrowers needing second mortgages and things to be aware of when it comes to obtaining private loans. In this post I will concentrate on the benefits of private lending from the investing and lending side.

    So how does one start lending money? You speak to a mortgage broker such as myself. As mortgage brokers we come across borrowers, who need second mortgages and some times even a third mortgage.

    There are various reasons somebody might need a second or third mortgage. For instance the first deal I did, was for an investor, who was doing a fix and flip in Burlington. They had a 1st and 2nd with Home Trust and needed some extra funds to complete the deal. As there was already a 1st and 2nd on title, I did a 3rd on a promissory note.

    Was I nervous – hell yes! However the broker who did the deal was a pro and did a full due diligence on the client to ensure the probability of default would be low.

    A promissory note is not registered on title but is backed up by a PPSA (Personal Property Service Agreement), which is my guarantee against borrower default. A promissory note is a legally enforceable agreement or document against the borrower and is a promise to pay back the loan.

    So what happened? It was a six-month loan for 15% per annum and included the lender fee. The borrower needed a further 3 months because the timing of when they completed the renovations and when they could place the house for sale was too tight. It got dicey as they could not sell the house and in the end the exit strategy for the borrower was to turn it into a buy & hold, which they still have today.

    Lender tip – always make sure that your borrower has a defined exit strategy.

    There are many benefits to being the lender, such as the borrower pays all fees including legal fees and you have steady cash flow each month as long as the borrower does not default on the loan. The default ratio in Canada is less than .035% however anything can and will happen, so make sure you protect yourself. Here are some other tips to make sure you protect yourself as the lender:

    • Make sure the mortgage broker provides a full workup of the borrower, such as credit bureau’s, mortgage application and appraisal;
    • Make sure that you get the contract reviewed by your lawyer – it will cost you a few hundred dollars but isn’t it worth it than losing out on the whole deal?;
    • Make sure all fees are outlined ahead of time – if the loan is less than $50,000 you only need one lawyer for both sides, however if it is for more than $50,000 you need a lawyer for the lender side and the borrower side. The borrower pays for all legal fees’;
    • Make sure your mortgage broker has done a suitability assessment for the borrower – you want to make sure that your borrower knows exactly what he or she is entering into and that they have been fully vetted. Same goes for lenders – as mortgage brokers’ it is our duty to do a suitability workup on you as well so we can be assured you know what you are entering into and that if a default occurs you can afford to be without your funds for the period of time it takes to settle the loan.

    I am currently in my second loan. It is a bit higher risk than the first but so is the rate of return. Basic rule of thumb is higher the risk the higher the rate of return, however don’t chase down deals based on the ROI as you will definitely end up losing in the end due to not having done your due diligence. You may not end up owning the property but you need to treat it just the same – always ask yourself, if “I was this borrower would I want to purchase that property?”

    Want to learn how to lend your funds for a great ROI? Tired of chasing down deals to buy properties in this over-heated market but want the same or higher cash flow? Want to diversify your holdings? Let’s talk about whether private lending is right for you. Reach out today and let’s have a discussion!