15 SECRETS TO PRIVATE LENDING
Private mortgage lending can be a rewarding way to invest. When done properly it provides predictable income secured by real estate while also helping borrowers navigate temporary financial challenges.
The reality is that bad things do happen to good people. A divorce, job change, business setback, illness in the family, or even upgrading education for a better career can disrupt someone’s finances for a period of time. These situations happen every day to otherwise responsible homeowners. That’s where responsible private lending plays an important role.
A well-structured private mortgage can give a borrower the time and breathing room needed to reset their financial situation, consolidate expensive debts, and eventually return to conventional financing.
For investors, these mortgages can provide predictable income secured by real estate. And when the structure makes sense, investors often feel good knowing their funds are helping someone get back on their feet. Over the years I’ve learned that successful private lending follows a few simple principles. These are the same guidelines I use when reviewing mortgage opportunities for investors.
By Gregory Stanley CFP CSEC
1. Triage the deals that makes sense
Just like a medic on a battlefield must decide which patients can realistically be saved, not every mortgage situation makes sense. Look for plums or apples, not rotten tomatoes.
2. Know the Story
Bad things do happen to good people. Understanding why someone needs to borrow is important. Is it a temporary bump in the road or a pattern of financial behaviour?
3. The situation should improve
A good private mortgage should improve the borrower’s financial position. Loan proceeds are often used to consolidate high-interest debts or stabilize monthly cash flow.
4. Borrowers must be able to carry the mortgage
The deal must work for both borrower and investor. In some cases, interest may be prepaid from loan proceeds while the borrower works toward refinancing.
5. The property must make sense
The property should be in an area with active real estate sales and comparable homes.
6. Independent property valuation
Each mortgage investment should be supported by a professional appraisal, so the investor clearly understands the value of the security.
7. Pride of Ownership
Borrowers who take pride in their home tend to protect it. A well-maintained property often tells you a lot about the borrower.
8. Conservative loan-to-value
As a general guideline we prefer total lending of 75% or less of the property value.
9. Limit additional borrowing
Regardless of how many mortgages exist on a property, the total combined loans should remain within conservative limits.
10. A fair return for the investor
Private mortgage rates reflect the structure and risk of the loan. The rate agreed to by the borrower is the same rate received by the investor.
11. Owner-occupied homes preferred
Mortgage investments are strongest when the borrower lives in the home. As a second option, stable rental properties with reliable tenants may also be considered.
12. Diversify your investments
Rather than placing all funds into one mortgage, many investors prefer several smaller investments. Diversification can also include different geographic areas.
13. One property – one investor relationship
Many private mortgages are structured so one investor is matched to one borrower and one property. In some cases, spouses or common-law partners may invest together. Investors are registered directly on title and receive payments directly from the borrower.
14. Full transparency
Investors receive documentation relating to the borrower, appraisal, and mortgage terms. The investor’s name is registered directly on title.
15. Clear cost structure
Private lenders do not pay broker fees. The borrower pays appraisal, legal, and related costs associated with the mortgage transaction.
The One Rule That Matters Most
Only invest in a mortgage you fully understand and are comfortable holding until it is repaid.
Mortgage documents are prepared by the lender’s lawyer, who represents the investor. The borrower signs those documents with
their own independent legal counsel (ILA).
The investor may speak with their lawyer at any time during the process to ask questions and review the structure of the investment. Once the mortgage is completed, the lawyer provides a complete legal reporting package for the investor’s records.
Legal costs are typically paid by the borrower as part of the mortgage transaction.