There’s one huge concern that any private investor of mortgages, or any type of investment for that matter, has: losing money on your investment. And while it’s true that mortgages are one of the soundest and most secure investments you can make, don’t make the mistake of investors past thinking there’s no possible way you could lose money. Of course, if the rare instance of a borrower defaulting on their mortgage occurs, the investor does stand to lose. The key is to ensure that doesn’t happen by simply making sure you don’t put too much on the line. And you can do that by following this simple loan-to-value ratio.
Any private investor worth his salt knows not to put up too much of the loan’s value on their own. Any and all borrowers need to be capable of putting up some of the funds for the mortgages themselves, or the investor simply has too much on the line. The key is to know how much of that mortgage to loan to the borrower, and how much to require they put up themselves.
It used to be that if private investors put up 85 per cent of the loan, they’d be fine. But that’s something that’s drastically changing in today’s mortgage landscape. With everyone being increasingly house-hungry, and the banks reigning in their lending practices and turning away more and more customers every day, there are simply more borrowers out on the market. And while that’s typically a positive in the eyes of investors, it also means that there are more unqualified buyers – which is a disaster for investors.
This is why today, smart investors know never to go above a 70 per cent LTV, and some even feel much more comfortable working off a 50 per cent LTV. This of course, means that the investor puts up no more than 50 – 70 per cent of the initial investment, thereby protecting themselves even in the rare instance that the borrower does default on the loan.
Of course, the best way to protect your investment is to work with a qualified investor adviser that can find and underwrite for you the mortgages that you’re going to invest in. Not only will they be able to recommend what the right LTV amount is for you, but they’ll also be able to ensure that you’re only working with qualified buyers in the first place.