Searching for the right investment can be complicated when you are swamped with an endless stream of information leaving you more confused in the end. From emerging technologies and the latest tech startups, investing seems to have become more complex.
With the countless investment opportunities available to Canadians, we wanted to examine the ones that may have been overlooked and are poised for growth within the context of real estate. Depending on your risk appetite, the allure of a new and aspiring company may seem promising but strategic investors tend to find success in proven and stable investments and not by chasing the next new shiny tech startup.
While Canada’s housing market is expected to have a modest increase this year and the overall economy is set on a steady course, we wanted to bring to light an often overlooked real estate investment opportunity that is able to weather an economic downturn and hold steady during market upswings – private mortgage lending.
Technology Investments
Technology continues to change the way we interact, buy, sell and even compete. It has dramatically affected and enhanced globalization which helped promote market transparency and expedite business processes. While technology may be poised to continue its growth trajectory, it is not an investment without its risks. Given the broad expanse of technology, this field requires a considerable amount of understanding of all the various components and intricacies behind the investment.
Some notable emerging technologies shifting the real estate industry are highlighted below.
- Artificial Intelligence – Canada is poised to be one of the market leaders in this rapidly expanding sector. Much of the talent is converging to push AI innovation so that it can encompass members who are not so technically inclined; designing tools that will become more natural to users who are not experts in the field. If applied to real estate, it could alter the way transactions are handled, and it could also provide deep market insights when it comes to real estate trends.
- Drones – Drones are set to massively impact the agricultural and transportation sectors; two of the most outdated sectors of the Canadian economy. With the advancement of this technology, research, planning and development practices will be transformed as they provide an alternative perspective. Real estate firms have simply utilized this technology for marketing individual homes, primarily in the luxury residential sector. However, real estate developers, as well as property investment companies, can harness this technology for greater insight to gain a birds-eye view of the physical landscape and the potential for transformation.
- Property Technology (PropTech) – According to CBRE, Toronto appears to be accelerating past Silicon Valley when it comes to the tech sector, ranking fourth among the most important tech hubs in North America. An impressive surge from rank 12 only two years ago. Browsing for house listings is now easier with the help of mobile apps; it makes buying and selling more personal and always available.
- Blockchain – The crypto market is unpredictable with BitCoin falling to its lowest level. However, blockchain technology has emerged to morph and adapt to various forms with massive potential to alter the Fintech landscape. Canada is one of the three most significant hubs for blockchain technology in the world. There are a number of Canadian startups applying this technology to property investing.
- Virtual/Augmented Reality – VR technology is on the rise and is expected to grow to $560-billion by 2025. However, this industry lacks investors, leaving many small tech-startups looking for investment opportunities to accelerate their growth trajectory. This sector can lead the local economy if given the right amount of spotlight.
- Autonomous Vehicles – Together with the surprising news from General Motors’ plant closures is the hope for the advancement of self-driving cars. There is an opportunity for
While industry analysts tout these investments as the next leading technology investments, the complexity and magnitude of moving parts behind each sector are often overwhelming and fraught with much volatility as these technologies are still taking shape and perhaps unproven.
The Rise of Private Mortgage Lending
Private mortgage lending not only allows the lender to earn above market rates of return, but it does so with an investment that is secured by real estate. Aside from the investment return component, the private mortgage typically helps revitalize and restore our neighbourhoods as well as provide local employment for local trades and contractors in the case of resulting renovations completed to the property.
Private lenders can avoid the ups and downs of the stock market with an investment that is secured by a significant amount of equity while receiving passive income and returns without sending their hard-earned capital to gamble on Wall Street. Instead, the investment is held securely in their own backyard.
With a private mortgage placement, private lenders are basically assuming the role of the bank. Instead of the mortgagee borrowing from a traditional lender, they borrow from another person, which is typically referred to as a private mortgage lender. These private mortgage loans are based on the value of the underlying asset in the present time and not based on future projections based on potential appreciation.
Many successful lenders in the real estate industry are those who invest in conservative deals based on verified numbers and ratios, and they don’t fall into the trap of speculation. With the proper due diligence and process, these investments should be income producing, high-yield, low-risk investments that significantly improve your investment portfolio, and peace of mind.
Not Just an Alternative Lender
While banks can typically offer the most attractive interest rates, they do not provide the same combination of transparency and speed in the decision making process compared to a private mortgage lender. These are a couple of the most common reasons borrowers turn to private mortgage lenders as they simply do not have the luxury of time that it often takes to go through the lending process to get a bank loan.
For instance, a real estate investor may enter into a contract on an investment property from a motivated seller with a tight closing timeframe. There is not enough time to go through the entire loan process with a bank and have to wait sometimes for weeks to hear back about whether or not you are approved. The real estate investment market often moves quickly, and investors need to move fast on properties.
Another typical reason many borrowers turn to private mortgage lenders is due to the type of property they are seeking to purchase may not qualify for a traditional bank loan or construction loan. In the end, banks analyze and value the strength of the borrower more than the numbers of the deal. Conversely, private mortgage lending is often referred to as ‘asset-based lending’ because what is most important to a private lender is the actual underlying asset itself. A bank may shy away from a potential loan solely because the borrower doesn’t have enough credit history, but the asset they are seeking the loan against may have 50% equity.
Would you rather lend to someone with only 5% equity (ie. 5% down payment) but with great credit or take your chances on a loan with 10 times the amount of equity and sufficient rental income to cover the expenses in the case of default? In the latter case scenario, the borrower may only have a couple of years worth of credit history and already own a primary residence? While this may seem like a slam dunk deal, it does not fit most traditional lender’s rigid lending criteria. Simply put, it doesn’t tick all their checkboxes to warrant the rubber stamp of approval.
A Win-Win Scenario for Investors and Borrowers
These are just a handful of circumstances which lead to an opportunity for private mortgage lending. Essentially, the private mortgage lender fills the growing gap that banks regulations are creating, as is a place for savvy investors to participate. A few of the main takeaways here include:
- There are billions of dollars invested every year in private mortgages and demand is increasing each year dramatically. Tighter mortgage regulations are pushing homeowners to borrow from private lenders. Private mortgage lenders are finding a significant increase in the percentage of consumers turning to their services for mortgage refinancing.
- Private mortgage lending creates an ideal “win-win” situation for both the borrower and the lender
- With the right process and documentation in place, private mortgage lending can help investors make money with minimal risk
- Not all borrowers are able to get approved for a bank loan, but this doesn’t always mean they are not worthy borrowers
The Canadian Real Estate Association (CREA) sees home sales increasing at 2.1% this year, with home prices keeping up with inflation at 2.7%. Although this rate will be slower compared to 2018, on a national basis, sales and prices appear to be stabilizing nonetheless. One point to keep in mind is that despite the regular cyclical housing cycles, homeowners are going to maintain their mortgage payments. Private lending is not built on the foundation of speculative investing in hopes of rising appreciation rates. Stable and consistent cash flow is the name of the game.
Final thoughts on investment opportunities
While the above-noted investment opportunities may seem promising, these opportunities require extensive due diligence and risk assessments. One element to be mindful of from a real estate perspective is the trickle down effect that these industries will have on their local real estate economies from a macroeconomic perspective.
The Oshawa GM plant may be shutting down only to make room for an electric car plant or an oil refinery may be substituted by a wind farm. These spur not only government and private level investment but also create jobs which in turn create demand for housing.
Studying housing trends in addition to economic events are what separate CMI from the majority of the real estate investment pack. CMI conducts ongoing research to understand where market opportunities lie so that their investors are positioned to reap the spoils of their market research.
Consult an expert regarding the investment of your choice and set targets.
