INVESTMENT STORY 1: Dr. Networth’s Private Mortgage Investment (First Mortgage Loan)

Today is the launch of the Investment Stories, as I hope to feature a reader’s real estate investment story every so often, so that we can learn from their experience.  To start off this series, the first story is from yours truly.

Please feel free to contact me if you want to share one of your Investment Stories with us

Let’s get right into it:

1) Please tell us about your background.   

I am a physician in my early 40’s who is a passive real estate investor.  I have invested in REITs, private mortgage loans, private equity and Joint Ventures.   I began investing in REITs back in 2011, and started with the other types in 2015

2) Please describe one of your successful real estate investments (past or present).

Today, I am going to discuss my investment with a private mortgage loan.  This is a first mortgage loan investment to an active real estate investor who purchased a building (6-plex) and required a private mortgage loan during the renovation period (BRRR strategy)

3) Where is the property located (city/province/state)?

Hamilton, Ontario

4) Are you the active or passive investor in this investment?   How did you find this investment?

Passive investor.  I found this investment through a mortgage broker.

5) How much was your original investment?  

Total mortgage loan requested was for $600,000.  Purchase price for borrower was $750,000.  Legal, mortgage broker and appraisal fees were covered by the borrower.

I invested $400,000 out of the $600,000 loan with funds from my and my wife’s registered accounts held at Olympia Trust.  The remaining $200,000 was loaned from 2 other passive investors arranged by the mortgage broker.  Therefore, this is essentially a syndicated-mortgage deal

Olympia Trust charges $100 for each new mortgage investment, and $12 administrative monthly for the duration of the mortgage and $25 mortgage discharge fee.   There is also a $150 annual account fee ($75 for each additional account).  HST also needs to be added on these fees.

(RRSPs, RRIFs, RESPS and TFSAs are all eligible for arms-length mortgages, but the funds need to held at an institution that deals with arms-length mortgages, such as Olympia Trust and Community Trust)

6) What was the risk of this investment?   What was the security?

The LTV (loan to value) of the mortgage was 80%.  Appraisal was done on property’s value to ensure property’s worth (this should be always done).  Appraisal fee was paid by the borrower. The borrower had to put up 20% down payment for the purchase of the property, so he does have some “skin in the game”.

The mortgage is registered against the property as security, so if the borrower fails to make payments to us (lenders) then we can legally get back our money by selling the property (similar to a bank if you defaulted on your principal residence mortgage payments).

The mortgage broker that I dealt with has a good reputation in the real estate industry and has vast experience in setting up private mortgage loans.  This mortgage broker also has a history of dealing with this particular borrower (active real estate investor) with no defaults or problems in the past.

7) What was the annualized ROI?   What is the breakdown of the ROI?

Annual interest rate is 10% + 1% Lender’s fee, therefore total is 11% annualized ($44,000 for the 1 year term minus Olympia Trust Fees).  Monthly interest payments are deposited automatically into our accounts held at Olympia Trust.

Lender’s fee was “upfront”, meaning that the 1% was given at the beginning of the mortgage loan. In other deals, Lender’s fee may be given at the end of the mortgage term.

8) When do you get your funds back?   

Mortgage loan is for 1 year.  Currently near the end of the term with option to extend, if requested by the borrower.

9) What do you like or don’t like about this particular investment?   Would you recommend this investment to your family members?  Any advice to give to the readers?

I like having the ability to use my registered funds to invest in private mortgage loans, as the taxes are sheltered.  The return is good, and the risk is mitigated by the fact that the mortgage is registered to the property as security.

The only downside of this investment, like most real estate investments, is illiquidity.  You do not get your funds back until the end of the mortgage term.  Therefore, the funds you use to invest should be funds that you don’t need access to in the short-term.

One additional point is that there is a bit of a “waiting game” when it comes to real estate investing.  It is not like buying a stock/ETF where you can buy or sell anytime you want to with a click of a button.   Sometimes, your funds may sit around in your account earning nothing until the right investment deal comes up, or there may be delays in closing of the mortgage loan for a variety of reasons out of your control.

I learned that private mortgage loans are quite passive, as the work to set them up is done by the mortgage broker and the fees to set of the mortgage loan is paid by the borrower.  There is not much for the lender to do apart from making sure his/her funds are available when needed and to sign legal/mortgage documents.

I feel comfortable investing in private mortgage loans, especially to borrowers who are experienced active real estate investors. Essentially the LTV (loan to value) decreases (therefore decreases your risk) throughout the course of the mortgage loan, because the renovations forcibly appreciate the property’s value

I have recommended private mortgage loan investments to my parents, as the monthly interest income is a great way to supplement their pensions.

The key is to find a mortgage broker/company that has experience and success in setting up thoroughly vetted private mortgage loans

After this mortgage loan closes and my funds are returned to our Olympia Trust accounts, I will reach out to my mortgage broker to look for another private mortgage loan investment.  Rinse.  Repeat.  Let compound interest do its magic.

10) If any reader wants to contact you, what is the best way to contact you?  

Through this blog! 🙂

Please follow and like us:

Leave a Reply

1 Comment threads
1 Thread replies
Most reacted comment
Hottest comment thread
2 Comment authors
Dr. NetworthLoonie Doctor Recent comment authors
newest oldest most voted
Notify of
Loonie Doctor

You have really given me food for thought. To have that kind of fixed income return is amazing and the set-up in an RRSP where tax sheltered is excellent. Illiquidity shouldn’t be a big concern in an RRSP also. How did you find the broker that got you involved in this?