Thought there was only one way to invest in private mortgages? You’d be wrong. There are actually many ways to invest in these types of mortgages and we’ll break down three of them here. After reviewing them though, you’ll most likely find that there really is only one good way to do it.
MICs, or mortgage investment corporations, are corporations that provide the money to borrowers for their mortgages. The funds loaned come from many different investors, and they’re all pooled together to make up the sum for one single mortgage (or in some cases, a package of different mortgages.) As the mortgage is paid off by the borrower, the principal investment is returned to each individual investor, with the interest return being divided between each investor. The problem with MICs is that they can be very complicated, and worse, you don’t make the return that you would investing in private mortgages other ways.
REITs are very much like MICs, with the exception that REITs are traded on the stock market. Because of this, REITs come with a lot more risk than MICs or investing in private mortgages on a one-on-one basis. It’s for this reason that REITs may be the worst way to invest in private mortgages altogether.
Investing in a one-on-one basis
Investing in private mortgages one-on-one simply means that you (or your mortgage broker) finds borrowers that need mortgages, but don’t have the qualifications needed to obtain one from a traditional financial institution. This is the best way to invest in private mortgages, as you’ll make the biggest return and won’t have near the risk that you would with either REITs or even MICs. The only term you’re locked into is the term that’s agreed upon when you first invest in the mortgage, not what term is outlined in any package or dependent on any other investor.
Some think that because you’re not with a big corporation, these mortgages have the biggest risk associated with them. However, it’s important to remember that with these mortgages, the borrower usually has to put up at least 30 per cent equity before being approved. That means that only a small fraction of the mortgage is needed by the borrower; and the best thing about these mortgages is that they’re also secured by the property. So even if the borrower defaults on the loan, the investor can collect collateral in the way of the actual property.
When it’s your time to invest in private mortgages, you’ll find many avenues that will help you do it. However, to get the most return out of that investment and take on the least amount of risk, investing in a one-on-one basis is the only right way to do it.