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Mortgage Investment

Increase your net value and improve your quality of living through innovative mortgage investment

Private mortgages have grown into a multi-billion dollar industry in Canada. This market allows investors to earn substantially higher yields (9% to 15% annually) on an investment - while offering the security of real property as collateral. With such high return and low risk, private mortgages have become an important fixed income vehicle for many investors.

Basic Mortgage specializes in private mortgages and offers you, the investor, an opportunity to participate in this lucrative field of investment. If you are interested in this investment, please review the following topics:

Investment Steps

Basic Mortgage is the broker to bridge between you, the investor, and the borrower. Once we receive a mortgage application, we undertake to analyze the borrower's asset portfolio and income, credit report from Equifax and the property. If this is of private mortgage type, we will contact you to provide you with a full disclosure on the borrower and the property. You will make a decision on whether to invest or not. A lawyer will draft all legal documents and register the mortgage with the government. You will then get post dated cheques for your investment and depositing them periodically into your bank account. [However, Basic Mortgage can be your investment administrator]

Return on Investment Analysis

Suppose you are going to invest $25,000 in a private mortgage, the term is one year only. The annual rate is 13% with repayment at the end of the term. The borrower is going to pay 3% (i.e., $750) as lender's fee and 2.5% (i.e., $625) as broker's fee. As the investor, you will get:

$750+$25,000x13%=$4,000

ROI=$4,000/$25,000=16%

This is the situation that you hold your investment for a full year. You may want to sell your investment (mortgage note) to a third party at a discount of 2%. Thus you get interest difference of $500 (i.e., 2% of $25,000). You then invest in another private mortgage again to get $4,000 annual return. So, your annual net gain for your investment is $5,250 (i.e., $750+$500+$750+$3,250). Overall, you would have 21% return on investment!

Now, if you invest your money twice a year for 5 years, at the end of five years, your $25,000 is turned into $51,250! If you re-invest your returns annually, the investment has grown to $64,843.

Risk Analysis

Risk exists in every type of investment. There is no exception to mortgage investing. However, mortgage investment is secured by the subject property and registered against the property in a central government registry. When in default, the lender takes over the property and executes "the power of sale".

The risks for mortgage investing are two folds:

(1) Property value: Not many investors are willing to lend 100% of the property value to the borrower. Loan to value (LTV) is 75% for conventional mortgages. To protect mortgage investors, the LTV does not exceed 80-85%. The chance of property depreciation of 15-20% is very slim in a year.

However, if the property value is "inflated" or "fixed" to a higher than market value, the investor would take a higher risk based on the LTV. This risk can be reduced by using professional property appraisers to assess the property's current fair market value.

(2) Risk with the borrower: The risk is non-payment and late payment. Risk reduction relies on credit analysis, guarantee and contract negotiation. Payment history on other debts would give you indication on the likeliness of non-payment. You can ask for personal guarantor for payment in case of default. Lastly, the mortgage term (i.e., the contract) includes options for mortgage default such as power of sale.

Investment Strategy

There is no risk-free investment. The difference is only the magnitude of risk. If one is content with 2.5% annual return from a bank's GIC and not willing to take higher risk, private mortgage investment is definitely not the choice. Reducing the risk by using logical analysis and proven methods is the right way to profit. The following are our strategies:

(1) Region: Select a region with which you are familiar and that has a good resale market, e.g., GTA. Avoid small towns, less populated areas. Always think of the "resale" market.

(2) Property price: High range or low range? The best strategy is to select average house. Those properties have fair market price and easy to sell.

(3) Mortgage type and LTV: Choose residential first, commercial second. LTV is not to exceed 85%.

(4) Borrower type: Choose those with positive net personal value and relatively good credit.

(5) Investment sources and amount: The investment can be savings or RRSP or corporate savings. The amount can be as small as $10,000. $20,000 to $50,000 are the most common.

(6) Exit strategy: you can invest or leave at your wish. Every mortgage investment is a mortgage note that can be traded. It can be sold partly or as a whole.