PRIVATE MORTGAGE financing

Investing in Private Mortgages

In the last few years’ investors have been looking for alternatives to the stock market. One area that has seen tremendous growth is the private mortgage sector. Private mortgages have become popular because they offer investors a high yield that they cannot get from GICs or bonds.

Yields of 9% to 11% are available for first mortgage investments while yields up to 15% are available for second mortgage investments. These investments are not without risk but the fact that they are secured by real property has made investors more comfortable.

So what should a novice investor be aware of when considering an investment in private mortgages? The first thing you need to do is understand what a private mortgage is. Essentially, it is just a loan secured by real estate. In a private mortgage investment, you become the lender and you decide whom you will lend your money to and under what terms and conditions.

You can choose to invest in first or second mortgages. A first mortgage means that, in the event of default, your mortgage would have first priority over other creditors. A second mortgage would be paid off only after the first mortgage was repaid in full.

The risk in any mortgage investment is that the borrower will not be able to make their mortgage payments. The typical remedy for this is to sell the house under Power of Sale. Keep in mind that property taxes and expenses like real estate commissions and legal fees must be paid from the sale proceeds before any money is paid to creditors.

To minimize risk, most first mortgage lenders will only lend up to sixty-five or seventy-five percent of the value of the property. Second mortgage lenders are usually looking for a higher yield and are willing to take more risk. In this market, most second mortgage lenders will lend up to eighty-five percent of the value of a home.

Private mortgages fill the gaps that institutional lenders, such as the banks, are unable or unwilling to fill. When a borrower has a unique situation or doesn’t fit an institutional lender’s normal lending criteria, a private mortgage is usually the only alternative for a borrower.

The difficult part in the whole process is finding a willing investor to meet the needs of the borrower.

When a broker is presenting a potential mortgage investment to you they will provide you with several pieces of information including a detailed application on the borrowers and an appraisal of the property involved. They will explain the pros and cons of the investment and recommend the terms and conditions for the mortgage. Ultimately, it is up to you to decide if this investment makes sense for your portfolio.

Private mortgages are illiquid, meaning that you cannot easily cash in your investment so you really have to be forward thinking. Most private mortgage investors will only agree to lend for a one-year term to help minimize the risks inherent to the real estate sector.

Self directed RRSPs are an ideal vehicle to invest in private mortgages. The interest that you earn is sheltered from tax within the RRSP and the trustee for your RRSP will administer the mortgage for you.

Private mortgage investments are not for everyone but they can be a solid performer for many portfolios. After yield, one of the key attractions of these investments is that they are a hands-on investment that can be easily understood. You can actually touch and feel your security (the real estate) and you can predict your risk much easier than you can with other investments like stocks and income trusts. If you enjoy choosing your own investments, a private mortgage may be a good addition to your portfolio.

WHY GET A PRIVATE MORTGAGE?

PROBLEMS QUALIFYING FOR A TRADITIONAL MORTGAGE [bad/no credit, excessive debt, or property doesn’t produce enough cash flow]

PRIVATE MORTGAGE INVESTORS are concerned with the appraised value.

While a traditional lender may look to the property, the borrower, and his/her credit, a private mortgage investor is concerned with the appraised value. As security, the property is producing or can produce enough income to pay the note and the value of the property leaving the issues of the borrower’s credit or income as a less important factor in providing the loan.

SPEED A mortgage from a traditional lender may take between 60-90days to fund. Traditional lenders need to obtain a formal appraisal of the property, perform a detailed examination of the borrower’s credit history and current financial status, and review financial statements and tax returns for both the Borrower and the property. A private mortgage investor can usually complete a transaction within 14-21 days. As the property itself is the main criteria in determining loan approval, there is much less examination of the Borrower and the Borrower’s other properties. The private mortgage investor can generally decide within 48 hours of receiving information; whereas a traditional lender may take weeks to have a loan committee commit to the loan.

PRIVACY Many Borrowers may not want or be able to provide personal financial information. They may be averse to the hassles of the application process associated with obtaining a traditional mortgage. A divorce or business separation may necessitate keeping financials under wraps. Accurate financials may not be up-to-date. While all these would negate or at least delay getting a traditional mortgage, it should have no effect on the Borrower’s ability to obtain a private mortgage.

ADDITIONAL LEVERAGE The Borrower may want to utilize less of his/her own capital in the property. A traditional lender will use the lesser of the purchase price of the property or appraised value; a private mortgage investor will decide on the appraised value. Hence, the Borrower utilizing a private mortgage is not penalized for purchasing the property at a significant discount to market value.

TERM MORTGAGES

• fixed-term first mortgages for many property types and unique borrower circumstances
• conventional interest-only or amortized mortgages with a fixed interest rate and maturity date
• covers both purchases and property refinancing
• structures vary according to transaction requirements and are flexible and custom-tailored to meet a Borrower’s specific real estate financing requirements
• relatively short-term real estate financing requirements [typically 1-2 year terms]
• real estate financing ranges from $100K to $10M

BRIDGE FINANCING

• short-term bridge financing solutions for both first and second mortgages
• bridge the arrival of long-term financing from a conventional institutional lender or to provide time to value-enhance a project or property type prior to sale
• bridge financing covers traditional and non-traditional situations and typically last from one month to one year
• ranges from $100K to $10M

ELIGIBLE PROPERTIES

Westrock Capital Corp. is a non-bank private mortgage investor focused on agricultural and commercial lending opportunities for well-located properties and projects in strong Ontario and BC markets.

Most of our commercial transactions are located within established urban centres; however,under the right circumstances we also provide financing for commercial opportunities in new emerging growth communities throughout Ontario and BC.

As a private mortgage investor, we selectively seek investment opportunities in niche markets or business sectors that have been typically under-serviced by larger traditional lenders.

Typical properties include the following:

• commercial buildings
• industrial buildings
• multi-family [apartment] buildings
• hotels/motels
• medical centres, nursing homes, and retirement homes
• development lands
• subdivisions
• farms, ranches, acreages, and bare land [our SPECIALTY]
• office buildings
• golf courses
• storage facilities
• places of worship

TERMS/GUIDELINES

• AREA [ON and BC]
• MINIMUM/MAXIMUM LOAN AMOUNT [$100K to $10M]
• MINIMUM/MAXIMUM TERM [6 months to 2 years]
• AMORTIZATION [interest-only or flexible amortization]
• RATE [varies between 9-11% per annum for first mortgages and 12-15% per annum for second mortgages]
• PAYMENT FREQUENCY [monthly or in some cases loans can include an interest reserve]
• LOAN TO VALUE [LTV] [up to 65% on agricultural and commercial mortgages, higher LTV ratios will be considered with collateral security]
• APPRAISALS [existing appraisals from a certified/qualified AACI appraiser up to 6 months old OR one year in some cases]
• RECOURSE/GUARANTOR [may be required]

TURNAROUND TIME [once we have the key information, we can usually provide a Commitment Letter within a few days and close within 14-21 days]

FORMULATING A LOAN REQUEST

The following headings are the typical sub-headings we like to see in a loan request which help to describe and explain key elements of the loan.

• AMOUNT OF LOAN[how much does the Borrower need? does the size of the loan make sense? is the amount enough to really work for the Borrower’s purpose?]
• SOURCE AND USE OF FUNDS[how will the loan be used? how much Borrower equity is there and how will it be used?]
• TERM[how long are the funds to be borrowed for?]
• AMORTIZATION[will there be principal re-payments or will the loan be interest only?]
• SECURITY[what is the security being offered?]

A full description of the land and buildings that includes all the key information, namely: location; size of lot; age of building/s; size of building/s with net rentable area and gross floor area if available]; type of building/s; uses; tenant mix; market factors; accessibility; type of construction; any other special characteristics etc.

Is there sufficient value? Will there be enough income to pay the mortgage payments and if not, is there a way to make the mortgage work by including collateral security? We help our Borrowers create value; usually there are points in the process where the value is not yet realized and using collateral security is one way to bridge those gaps in time.

BORROWER/GUARANTOR DETAILS [who are the Borrowers and/or Guarantors? what experience do they bring to this project? any prior relevant experience should be described in detail]

EXIT STRATEGY [HOW WILL THE LOAN BE RE-PAID?]

Private mortgage investors want their clients to be able to transfer to a traditional lower rate mortgage within a year to 24 months which is also in their best interest, so we want to ensure they have an exit strategy in place! We work with our Borrowers to ensure a plan is in place and is followed through.

Understanding what the Borrower requires and what will work best for all parties involved means conducting comprehensive due diligence that is sufficiently detailed to answer any questions that may arise; including a detailed review of the Borrower’s financial statements and the property’s operating statements for the last three [3] years, and a careful evaluation of any pro forma assumptions that may have to be relied on in the case of new development projects.

Our quick turnaround depends on getting the required information in a timely manner.