What is the real estate investment deal?
In this post, I will be describing my investment into a 2nd mortgage loan. Funds from the second mortgage loan investment were used by the borrower for renovation costs for a triplex property.
A 2nd mortgage loan is an additional loan taken out on a property that is already mortgaged.
The LTV (loan-to-value) of the 2nd mortgage was 90%. Ideally, you want to aim for 80% or lower, but in the case of 2nd mortgage loans, the LTVs may be higher. In return, the interest rate will usually be higher than a 1st mortgage loan.
Why would a real estate investor take out an additional loan for renovations?
- their funds are tied up with other investments/properties and they cannot access their funds immediately
- they have found a distressed investment property that they are confident will return a high ROI after renovations, even after paying 10-12% for private mortgage loans, like this example
- they are comfortable with this type of short-term leverage since their goal is to refinance the property at the end of renovations using the BRRR strategy
- their plan is to pay off the private mortgage loans with the proceeds of the refinance
Are you the active or passive investor in this investment?
I am the passive investor (lender) in this investment.
There are mortgage broker fees and legal fees for the set-up of private mortgage loans, however, these fees are covered by the borrower. As the lender, you do not pay any of the fees. Pretty sweet deal!
How much was the investment? What was the Return on Investment (ROI)?
My investment was for $100,000 and I used funds from my RRSP. The funds have to be in an RRSP account that allows for arms-length mortgages, such as with Olympia Trust.
The investment was into a second mortgage loan at 12% interest rate, paid monthly for 12 months.
Unlike purchasing an ETF with a click of a button whenever you want, the timeline for real estate investments may be fluid. Similar to when you purchase a primary residence, the closing date may not be exactly as scheduled due to a variety of factors. Although my investment term is for 12 months, the actual duration may be:
- shorter if the borrower finishes the renovations and completes the refinance earlier, thus can pay off the mortgages
- or longer if the borrower needs more time for renovations +/- refinance process
Either way, the interest payment is always pro-rated to the length of the investment. If the borrower takes longer, then great, I get paid more interest payments. If the borrower takes less time, then that’s fine too. I can get back my original investment with the paid interest payments and then find another real estate investment deal to invest in.
Real Estate Portfolio Update
As you may recall from “Building a Real Estate Empire”, I demonstrated how to build a real estate portfolio with a Medical Professional Corporation:
As you know, I write this blog for fun and to share with others what I have learned about personal finance and investing. In turn, I learn a lot from the comments section and from other bloggers. I write this blog anonymously with no intention of changing this. That’s just my preference.
To illustrate a “real life” real estate portfolio (without revealing too much detail) here is my budding real estate empire with investments that I have already posted about in “Investment Stories”, but wrapped up in a single overview flowchart.
Keep in mind that my real estate portfolio was built WITHOUT me having to:
- fix any toilets or do any repairs/renovations
- meet or vet any tenants
- deal with any problem tenants
- search for and visit properties
I like to call this my “Couch-Potato Real Estate Portfolio”. 🙂