# Second mortgage as investment? Yay or nay?



## secretly.lazy (Sep 17, 2015)

I am looking to invest some money in second mortgages. I have talked to some mortgage brokers, and am thinking of using my 25k RRSP and 25k TFSA towards investing in second mortgages. I have been doing real estate for 5 years, but not much on the "debt" side of things.

Does anyone have any good or bad experiences with 2nd or 3rd mortgages? Any advise for someone getting started? What should I look out for?

Some background:
- I understand numbers and ROIs
- I feel I am ok with higher risk
- I am looking at deals in Calgary/Edmonton


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## birdman (Feb 12, 2013)

I have experience in lending and have been involved in 2nd mtges and MIC's on a number of occasions. Wish I had learned my lesson the first time. Have usually managed to escape the investments relatively unscathed but still have a ways to go with a couple of MIC's. Once I get out of these, never again. Certainly not for me and if you decide to proceed I suggest you be very cautious.


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## secretly.lazy (Sep 17, 2015)

What were some of the issues you faced, if you don't mind sharing?

Was it the market dropping leaving you with poor LTV?
Was it is missed payments from borrower?
Did you do a credit check and due diligence on the borrower?


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## GoldStone (Mar 6, 2011)

6 big banks
a bunch of alternative lenders: Home Capital, Equitable, First National, Peoples Trust, and so on so forth
countless credit unions

All of them are eager to lend. They are bending over themselves to write mortgages.

With that in mind, why would a borrower need a second mortgage from you? 

Is there any good explanation, other than crappy credit history / low income / lack of steady job?

Me thinks you will be scrapping the bottom of the barrel in terms of borrower quality. Meanwhile, our glorious real estate bubble keeps inflating. Are you sure it will never burst? The loan you write is a fact. The value of the collateral is anything but.

I can't believe I had to type this.


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## secretly.lazy (Sep 17, 2015)

GoldStone said:


> 6 big banks
> a bunch of alternative lenders: Home Capital, Equitable, First National, Peoples Trust, and so on so forth
> countless credit unions
> 
> ...


Everyone has different situations when they need a second mortgage. But yeah, primarily weaker credit. As a lender, I understand the key thing is to make sure there is not a history of missed payments, but a one time blip. So I have asked my broker to filter me only those deals that have a historically strong payment history (except who have a blip here and there). It is not black and white. I have done this kind of a deal before a while back, I received 14% interest only returns for 2 years. The borrower needed a loan to develop his basement. Never had a missed payment or any problems.

But given the potentially softening market, I wanted some second opinions.

Where or not a bubble exists is not a fact. And assuming a bubble does exist, what would the market drop by? 10%? 20%? (even in 2008-09, it dropped by less than 10% am i correct?).

What if your loan does not go above 70% LTV (loan to value) on the collateral? Still receiving 10-12% returns. and you are protected for 30% of the existing owner's equity.


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## birdman (Feb 12, 2013)

As requested, here is my experience:
No 1. This was in the early 1980's and interest rates were high and rising. 5 of us started a high rate mtge inv. co and purchased 5 mtges from a broker. All were around 22% but mind you, prime rate was around 12% or so (I think), To start we each put in $5,000. and borrowed 50,000. from the bank @ P +1% ?? and also injected 100. pm into the account. Of the 5 mtges we bought, 2 went bad. One was a rural property in Savana (near Kamloops) and was over a mobile and was a rental. The owners and borrower lived next door to the property our mtge was on and had never missed a beat in their mtges over both places. Then, they just said they were walking away and not making any more pymts. Our mtge was a 1st charge and the l/v (loan to value substantiated by an appraisal, was 70%. Anyways, we got out of it after a few months as our mtge was inadvertently reg'd over the residence and the mtge broker paid us out.
No 2 had a 2nd mtge over a Coquitlam property (by Vancouver) at 22% and again, the l/v was less than 75% and the owner(s) had ability to service the debt. They paid for a year and then just stopped paying all mtges. When we looked at the house after the loan went bad the once beautiful yard was over knee deep in grass and weeds, there were ink and pencil engravings of tel nos on the wall by the phone, the paint and flooring was very bad. They had just let the place deteriorate. The property sold and we were well short of getting paid. The owners made an assignment in bankruptcy but we opposed the discharge and eventually got another $6,000. or so
No 3 MIc No 1: Its doing ok but with low rates and the competitive nature of the business along with some loan delinquencies the return which was at around 10% in now about 2%. 
no 4 Mic No 2: Again, it was paying around 9% but is now around 1 or 2% with some big problem loans. Neither of the loans should have been made but they were development financing that they had to foreclose on and take the property and now they have to either finish the property or complete the developments. 

In summary, the loans we did first and purchased from a broker all qualified with good l/v's, cr ok, steady employment, etc. Obviously the higher interest rates created a problem and they just decided to walk. Property values fell in BC by about 50% during that time. Just poor timing.
The mic's were just not properly managed. Even though appraisals, cash flows, etc were all supposedly ok I don't think the loans should have been made and I didn't realize the MIC's were doing the level of development financing they were.
All of this and greed got the better of me. Like I mentioned earlier I have a strong background in lending including large commercial and development, etc. Unfortunately, I did not make the loans or were privy to the underwriting. I think the mistake was purchasing or investing in mtges. made by others (brokers, MIC managers, etc). Also, you must be aware that there is a reason for borrowers going to a secondary lender. Fortunately I don't think I will be backwards very much once things get wound up or resolved over the next year or two. Hope this helps.
PS Remember if int rates go up significantly house prices will fall


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## secretly.lazy (Sep 17, 2015)

frase said:


> As requested, here is my experience:
> No 1. This was in the early 1980's and interest rates were high and rising. 5 of us started a high rate mtge inv. co and purchased 5 mtges from a broker. All were around 22% but mind you, prime rate was around 12% or so (I think), To start we each put in $5,000. and borrowed 50,000. from the bank @ P +1% ?? and also injected 100. pm into the account. Of the 5 mtges we bought, 2 went bad. One was a rural property in Savana (near Kamloops) and was over a mobile and was a rental. The owners and borrower lived next door to the property our mtge was on and had never missed a beat in their mtges over both places. Then, they just said they were walking away and not making any more pymts. Our mtge was a 1st charge and the l/v (loan to value substantiated by an appraisal, was 70%. Anyways, we got out of it after a few months as our mtge was inadvertently reg'd over the residence and the mtge broker paid us out.
> No 2 had a 2nd mtge over a Coquitlam property (by Vancouver) at 22% and again, the l/v was less than 75% and the owner(s) had ability to service the debt. They paid for a year and then just stopped paying all mtges. When we looked at the house after the loan went bad the once beautiful yard was over knee deep in grass and weeds, there were ink and pencil engravings of tel nos on the wall by the phone, the paint and flooring was very bad. They had just let the place deteriorate. The property sold and we were well short of getting paid. The owners made an assignment in bankruptcy but we opposed the discharge and eventually got another $6,000. or so
> No 3 MIc No 1: Its doing ok but with low rates and the competitive nature of the business along with some loan delinquencies the return which was at around 10% in now about 2%.
> ...


Solid insights. Thanks ! Much appreciated 
I totally agree with you on the MICs not being under your own control. And lender needs to underwrite every deal himself.


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## GoldStone (Mar 6, 2011)

secretly.lazy said:


> So I have asked my broker to filter me only those deals that have a historically strong payment history (except who have a blip here and there).
> 
> ...
> 
> What if your loan does not go above 70% LTV (loan to value) on the collateral? Still receiving 10-12% returns. and you are protected for 30% of the existing owner's equity.


How confident are you that it's truly just a blip here or there? What kind of due diligence can you do yourself to confirm this? Your broker has a massive conflict of interest. He has a strong incentive to mislead you.

If it's really just a blip here or there and nothing more than that, why do they have to pay 10-12%? They should be able to get much better terms from the sub-prime lenders.


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## secretly.lazy (Sep 17, 2015)

GoldStone said:


> How confident are you that it's truly just a blip here or there? What kind of due diligence can you do yourself to confirm this? Your broker has a massive conflict of interest. He has a strong incentive to mislead you.
> 
> If it's really just a blip here or there and nothing more than that, why do they have to pay 10-12%? They should be able to get much better terms from the sub-prime lenders.


Due diligence: Would include the person's credit history, go through his credit statements, and what loans he has to service.
Also, look at his employment. Is he in the oil patch? Or does his income look stable given the economic climate?

By minor blip, I meant: A one time screw up by the borrower. Meaning missed payments on a credit card OR library fees - small things they forgot to pay which affected their credit and thus, they cannot qualify conventionally. Another example is that of self-employed or small business owners. I understand they have a challenging time qualifying just because they don't receive a T4 income. Thus, the Big 6 and traditional lending institutions look at them as higher risk, and ask for more skin in the game. Another example I have seen is a person was getting divorced and having a tight deadline to sell his rental property and give wife half the proceeds. Hence, he decided to do a 2nd mortgage on his rental property to pay his wife off, instead of selling the rental in a quick sale. I can't remember why, but mainstream banks or even the "B Lenders" did not lend. Traditional lenders are quite conservative.

Every situation is different.

Broker may have a conflict of interest, but I end up making the decision on my own due diligence. I realize broker makes money if i close the deal. a good point nonetheless. also, if i was a broker, screwing my lender will not help me in the long run. Broker would just lose business.


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## MorningCoffee (May 8, 2013)

One thing to keep in mind is that primary mortgage lenders have priority over 2nd and 3rd mortgage lenders in case of default. In case of foreclosure or power of sale, you could be out of luck, especially if housing prices fall or the real estate bubble bursts.


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## GPM (Jan 23, 2015)

I looked at a few mics. Felt the same, lenders are too aggressive now to leave good clients. Too high a risk for me, even though the returns were good. It looks like they are dropping according to frase.

2nd mortgage was too much money in 1 place for me. The returns look impressive if you can stomach the risk. Lots can.

I just took the mortgage from my house and stuck it in my RRSP. Instead. I put it at a high rate, like my previous house and smile myself to sleep every night knowing bonds have to cash eventually. 

I have several colleagues who have done the same. If I have to pay, I'm happy to be paying myself. I know I'm a good client. Note I'm older so I remember mortgages up to 18% with my parents and 9% with me, so I was comfortable with a highish rate - better than bonds and the market for the year.

Not sure if it's an option you would consider. Just throwing it out there if you were looking for diversification. The profits are much less than what you fellows have been speaking of though.

Brokers in anything always have a conflict of interest.


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## GoldStone (Mar 6, 2011)

secretly.lazy said:


> By minor blip, I meant: A one time screw up by the borrower. Meaning missed payments on a credit card OR library fees - small things they forgot to pay which affected their credit and thus, they cannot qualify conventionally.


Again, if their credit issues are really that trivial, they should be able to qualify at a sub-prime lender. On better terms than 10-12%.



secretly.lazy said:


> Another example is that of self-employed or small business owners. I understand they have a challenging time qualifying just because they don't receive a T4 income. Thus, the Big 6 and traditional lending institutions look at them as higher risk, and ask for more skin in the game.


Sub-prime lenders like Home Capital lend to self-employed and small business owners. It's big part of their business. If a person can't qualify at Home Capital or the likes of it, something doesn't add up in their story.

Anyway, I have no skin in this game. You want to gamble... you go right ahead. Good luck.


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## Emjay85 (Nov 9, 2014)

MorningCoffee said:


> One thing to keep in mind is that primary mortgage lenders have priority over 2nd and 3rd mortgage lenders in case of default. In case of foreclosure or power of sale, you could be out of luck, especially if housing prices fall or the real estate bubble bursts.


The cards need to be played right. In this situation, you would need to get your lawyer involved (at the expense of the borrower of course), inform the borrower of what is happening and what is going to be done to proceed, jump in and pay the first mortgage until the borrower either gets payments up to date and all fees paid or the house sells, first mortgage is discharged, owner gets whatever he is legally entitled to and what is left over, assuming LTV is good, goes in your pocket. 

That is best case outcome of the worst case scenario I believe. 

I have also been toying with this idea also. It is tempting and does make sense until, as others have stated, house prices fall and takes your safety net with it.

I have seen the deals on paper and it is usually written well. Most end up selling the house to pay off the first and second mortgage, others roll in both onto a decent first mortgage after their credit issues get dealt with and the banks open their doors again. 

I think two key factors are having a mortgage broker you trust, and a really good lawyer on your side.


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## dougboswell (Oct 25, 2010)

MorningCoffee said:


> One thing to keep in mind is that primary mortgage lenders have priority over 2nd and 3rd mortgage lenders in case of default. In case of foreclosure or power of sale, you could be out of luck, especially if housing prices fall or the real estate bubble bursts.


Also if they are behind on the property taxes the municipality gets first shot at the proceeds. The 1st lender has to pay real estate fees, management fees and appraisal fees before they can apply the amount to the mortgage amount owed. You as a 2nd or 3rd holder in all probability will not get your full investment back if any.


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## birdman (Feb 12, 2013)

I agree with dougboswell re costs and not only does the 1st mtge have to get paid, and real estate fees, taxes and mgmt & appraisal fees but there can be legal fees for the first mtge, repairs and maintenance, utility bills (electricity, gas, water, etc), insurance, and on and on it goes. The owner would probably press for conduct of sale which the court would most likely grant and during this time none of the mortgages will be paid. Accordingly, the second or subsequent mtge holder ends up paying all the costs including interest on all underlying mtges ahead of yours and there would most likely be no income. Yuk. If the owner does not cooperate it normally would take about a year before the second mtge holder would be in a position to sell the property and by the time the costs mentioned above are paid you are probably backwards. Nasty and a place you don't want to be in.


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## gt_23 (Jan 18, 2014)

secretly.lazy said:


> I am looking to invest some money in second mortgages. I have talked to some mortgage brokers, and am thinking of using my 25k RRSP and 25k TFSA towards investing in second mortgages. I have been doing real estate for 5 years, but not much on the "debt" side of things.
> 
> Does anyone have any good or bad experiences with 2nd or 3rd mortgages? Any advise for someone getting started? What should I look out for?
> 
> ...


I've been lending 2nd mortgages for the last few years and now have a portfolio of 10 of them. I have found that the returns are lower than direct real estate investing (my avg. is 15-20%), but there is substantially less work involved. You should establish relationships with a network of brokers who get good deal flow for 2nds and don't deal with only one broker. While there's no official stats on this segment of the lending market, most brokers I've spoken estimate the default rates in the 5-10% range, which not surprisingly is quite higher than the AAA market. You should be comfortable lending on the asset even if the borrowers stop paying you.

Finally, there is a huge opportunity to make big profits when the borrowers (inevitably) miss payments, bounce checks, miss renewals, etc, as the fees for doing so are quite punitive. You should decide whether you are going to go by the book or be more forgiving and work with the borrowers through the many issues that will arise. Most are trying to work through past credit/spending issues, pretty much every one I have done has involved some sort of debt refi or consolidation to a lower rate.

As for underwriting, getting this right is probably the most critical piece and too lengthy for this post. However, as you get better relationships and start doing deals with brokers (and closing fast, they love that), they will send you better deals (lower risk-adjusted returns). As a worst case if you need to go Power of Sale, you will need about 5% of the property value to cover your costs in that process (find a lawyer that works on contingency with good equity in the asset), so at the very least always make sure you have enough equity on top of you to cover the legals if the worst case materializes.

good luck.


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## gt_23 (Jan 18, 2014)

frase said:


> If the owner does not cooperate it normally would take about a year before the second mtge holder would be in a position to sell the property and by the time the costs mentioned above are paid you are probably backwards. Nasty and a place you don't want to be in.


Depends, I've completed POS in 3 months, never more than 6 months. (In Ontario)


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## secretly.lazy (Sep 17, 2015)

gt_23 said:


> I've been lending 2nd mortgages for the last few years and now have a portfolio of 10 of them. I have found that the returns are lower than direct real estate investing (my avg. is 15-20%), but there is substantially less work involved. You should establish relationships with a network of brokers who get good deal flow for 2nds and don't deal with only one broker. While there's no official stats on this segment of the lending market, most brokers I've spoken estimate the default rates in the 5-10% range, which not surprisingly is quite higher than the AAA market. You should be comfortable lending on the asset even if the borrowers stop paying you.
> 
> Finally, there is a huge opportunity to make big profits when the borrowers (inevitably) miss payments, bounce checks, miss renewals, etc, as the fees for doing so are quite punitive. You should decide whether you are going to go by the book or be more forgiving and work with the borrowers through the many issues that will arise. Most are trying to work through past credit/spending issues, pretty much every one I have done has involved some sort of debt refi or consolidation to a lower rate.
> 
> ...


Thanks. Great to hear it works out, if one does their due diligence and underwriting well 

I believe that if one really understands the risks well, he or she can put plan A, B and C exit plans and be ok. I feel most people take everything at face value (for example - Stocks are risky OR People with non-AAA credit means "very high risk"). I find people do not put in the effort to really understand their risks and deals. They hope someone else will do it for them. And then they suffer. They don't question. I have done this myself, lost money, and decided never to invest outside "my circle of competence" aka hard real estate.

It is good to get some data that the default rate indeed is higher than AAA, but it is still 5-10%.

Let's so some real math and numbers instead of "arm waiving and being scared of risk". a 7% delinquency on gross returns on a 15% ROI is still a net return of 8%. So you are still getting a solid return on your portfolio. Maybe, I am being overly simplistic. But basically, if your return > delinquency rate, aren't you winning?


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## nobleea (Oct 11, 2013)

secretly.lazy said:


> Let's so some real math and numbers instead of "arm waiving and being scared of risk". a 7% delinquency on gross returns on a 15% ROI is still a net return of 8%. So you are still getting a solid return on your portfolio. Maybe, I am being overly simplistic. But basically, if your return > delinquency rate, aren't you winning?


In a steady market, delinquency is around 7%. But in a declining market? Individual deals like this will be heavily tied to the local employment market. Given that you're looking at Calgary/Edmonton, your success becomes heavily dependent on O&G market.
I'm sure that on a long enough time line, your annual returns would fluctuate between 5-12%, accounting for delinquencies. But there could be one or two years that completely wipe you out. Your upside is limited due to the fixed rate, but your downside is not. Well, protected to the money you put in I guess.


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## OurBigFatWallet (Jan 20, 2014)

I'm not familiar with these but it sounds like it could go south in a hurry for the wrong deal. Limited upside and lots of potential downside as mentioned above. If it's real estate you're after why not invest in a few high quality REITs? I'd be willing to bet the long term returns would be comparable (if not higher) with much less stress


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## gt_23 (Jan 18, 2014)

secretly.lazy said:


> Let's so some real math and numbers instead of "arm waiving and being scared of risk". a 7% delinquency on gross returns on a 15% ROI is still a net return of 8%. So you are still getting a solid return on your portfolio. Maybe, I am being overly simplistic. But basically, if your return > delinquency rate, aren't you winning?


Keep in mind, default doesn't mean you're taking a loss, it just means the borrowers have been in arrears for a while and show no signs of turning things around, and you need to use the legal system (pos) to get your money back. As long as you did your due diligence in the underwriting phase, that shouldn't be a problem. The biggest risk to absolute loss is if you lend high LTV and/or the real estate market declines at the same time the borrowers are defaulting. However, if your charge is recourse (it is in Ontario) you can mitigate this as well by choosing young(ish) two-income household borrowers with long lives ahead of them.

The risk of absolute loss is probably so low as to not impact your net returns. Another thing to keep in mind, arrears rates are probably at least 25% for this segment. Arrears are basically any temporary deviation in the contractual terms or pre-default, which are usually handled swiftly when the borrowers receive a lawyers letter demanding full payment to the lawyers office within 7 days. Plus, as an investor you should love them, because anything that deviates from the contractual terms usually results in you getting a nice fee independent of the loan interest. So if you decide to do this, you should be prepared to have regular arrears and make sure you're not too dependent on the interest payments arriving as per the contract.


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## gt_23 (Jan 18, 2014)

OurBigFatWallet said:


> I'm not familiar with these but it sounds like it could go south in a hurry for the wrong deal. Limited upside and lots of potential downside as mentioned above.


I actually look at it quite differently. The worst case scenario is you receive your interest and fees as laid out in the contract and payout of the mortgage in 1 year (a 10-20% return). The best case scenario is that you get all of the worst case plus all kinds of fees, or in the absolute extreme, you get the property for a discount. This is rare and never happened to me, but the brokers I've worked with have had clients walk away and hand over the keys instead of going through the legal process.



OurBigFatWallet said:


> If it's real estate you're after why not invest in a few high quality REITs? I'd be willing to bet the long term returns would be comparable (if not higher) with much less stress


I would definitely take that bet if you'd like to make it. REITs are incredibly interest-rate sensitive why would you subject your capital to that much risk in this low-rate environment for only a 6-8% dividend yield. As the shareholders of CPG will have now learned well, risking your capital for a higher yield is foolish. With private lending, you can achieve a much higher security of your capital combined with a higher yield. And it is quite passive as well.


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## GoldStone (Mar 6, 2011)

gt_23 said:


> And it is quite passive as well.


You must have a very different definition of "passive" than most of us.

One POS is probably more work than 10 years worth of truly passive investing.


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## Valueinvestor (Dec 10, 2014)

gt_23 said:


> I actually look at it quite differently. The worst case scenario is you receive your interest and fees as laid out in the contract and payout of the mortgage in 1 year (a 10-20% return). The best case scenario is that you get all of the worst case plus all kinds of fees, or in the absolute extreme, you get the property for a discount. This is rare and never happened to me, but the brokers I've worked with have had clients walk away and hand over the keys instead of going through the legal process.
> 
> 
> I would definitely take that bet if you'd like to make it. REITs are incredibly interest-rate sensitive why would you subject your capital to that much risk in this low-rate environment for only a 6-8% dividend yield. As the shareholders of CPG will have now learned well, risking your capital for a higher yield is foolish. *With private lending, you can achieve a much higher security of your capital combined with a higher yield. And it is quite passive as well*.


You think private mortgage lending is passive and lower stress than a REIT? I have a feeling some may not agree with your idea of low stress and passive. Is private mortgage lending eligible for a tax free account?


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## lost in space (Aug 31, 2015)

gt_23 said:


> I would definitely take that bet if you'd like to make it. REITs are incredibly interest-rate sensitive why would you subject your capital to that much risk in this low-rate environment for only a 6-8% dividend yield. As the shareholders of CPG will have now learned well, risking your capital for a higher yield is foolish. With private lending, you can achieve a much higher security of your capital combined with a higher yield. And it is quite passive as well.


True but most people buy REITs for the dividend and as long as you don't sell in a panic you'll do fine (assuming the REIT itself isn't in trouble). The main risk I see for someone getting into this is lack of experience, it might make sense if you're willing to do the research or have an experienced partner, but for most people a REIT (ETF) is simply a better way to go


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## gt_23 (Jan 18, 2014)

GoldStone said:


> You must have a very different definition of "passive" than most of us.
> 
> One POS is probably more work than 10 years worth of truly passive investing.


Well please enlighten me with your definition of passive. You get post-dated cheques, you take them to the bank to deposit them, you can do as much or as little accounting as you like. Anything else, including POS, is handled by the lawyers. I think you will spend more time selecting your all-star REITs (btw how are they doing?) than taking cheques to the bank, but if that's still too active, you can drop of a years worth and the bank will auto-deposit them/


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## gt_23 (Jan 18, 2014)

Valueinvestor said:


> You think private mortgage lending is passive and lower stress than a REIT? I have a feeling some may not agree with your idea of low stress and passive. Is private mortgage lending eligible for a tax free account?


Stress is a relative term. If holding a private mortgage is more stressful for you than holding a public REIT or MIC in this environment, than you probably don't have a good grasp of risk.

As for passive vs. active, I stand by my assertion. Finally, you can lend in registered accounts through intermediaries but there are fees involved.


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## secretly.lazy (Sep 17, 2015)

Valueinvestor said:


> You think private mortgage lending is passive and lower stress than a REIT? I have a feeling some may not agree with your idea of low stress and passive. Is private mortgage lending eligible for a tax free account?


Yes, private mortgage lending is eligible for a Tax Free account.
I plan to invest my RRSP and TFSA towards private lending. You can use companies like Olympia Trust.

To the question of "how passive is Private mortgages", you can think of yourself as a mini version of Scotiabank. Do you think the banks make the "interest" they charge you on your monthly mortgage payments ...passively?

Lending is one of the most passive forms of investing since you don't deal with rental headaches unlike owning a rental property.


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## GoldStone (Mar 6, 2011)

gt_23 said:


> Well please enlighten me with your definition of passive. You get post-dated cheques, you take them to the bank to deposit them, you can do as much or as little accounting as you like. Anything else, including POS, is handled by the lawyers. I think you will spend more time selecting your all-star REITs (btw how are they doing?) than taking cheques to the bank, but if that's still too active, you can drop of a years worth and the bank will auto-deposit them/


My idea of passive investing:
- buy 3 or 4 broad market ETFs
- go fishing

Your idea of passive investing:
- build the relationship with a RE lawyer
- build a network of mortgage brokers
- review deal offers coming from the brokers
- talk to the brokers to get more details
- do deeper due diligence on the deals that look interesting
- engage the lawyer to close the deal
- review legal paperwork and close the deal
- work with the lawyer if and when the mortgage goes delinquent
- work with the lawyer if and when you need to do POS

Did I miss anything?

BTW, I am not here to win the argument. There is no right or wrong way to invest. Everyone should stick to what they are comfortable with.

BTW2, I don't invest in REITs. Or even REIT ETFs.


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## Berubeland (Sep 6, 2009)

Just about everyone who is not canadian agrees we are in a massive real estate bubble. 2nd and 3rd mortgages are a horrible idea. I have some clients who are taking out helocs on their rental properties and doubling down on 2nd and 3rd mortgages. 

Risky business holding the paper on a descending asset class. Of course if you're comfortable catching a falling knife go right ahead.


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## secretly.lazy (Sep 17, 2015)

GoldStone said:


> My idea of passive investing:
> - buy 3 or 4 broad market ETFs
> - go fishing
> 
> ...


I am curious. What are the typical returns for ETFs?

Also agreed, it is not 100% passive until the point of closing. You do have due diligence, and so on.
However, I think we are talking about two different things here.

You are focussed on "investing" only. I am focussed on "building streams of income". Hence, I am willing to do the extra work, and as you will see below, how i have set up my rental property portfolio and also plan to do the same for second mortgages.

This is possibly the top 2 reasons why I invest in Real Estate and most investors i feel miss 2 KEY things here when they do stocks. 

1. Scalability - Hire people at $2.50/hr (max 1-2 hrs a week) to do underwriting of deals on an pre-defined excel template. My time commitment for any deal is never more than 30 mins to 1 hr since most of the work is done by the $2.50/hr guy, my realtor and my mortgage broker. I would be using the same system towards doing second mortgage deals. As for signing documents, try something called "DocuInk". I digitally sign all documents via my cell phone that my mortgage broker sends me. There is no "engagement with lawyers and brokers". I am the client, so everyone involved is copied in the emails for transparent communication. I get the final paperwork via email, open on my cell phone using the DocuInk app, and then take about 30 seconds to sign. Every deal is the same. Just numbers are different.

Can't believe "signing and doing paperwork" is an issue in 2015 here....

2. Infinite growth - Once I have a working system, I have personally seen my close friends and family gravitate towards me. This means they invest with me and let me charge a flat 2-3% spread on anything they invest in my deals. Why? Since they get to use my "system" to underwrite and get my trusted advice on any deals they are closing with me. Sometimes, I invest my money with them as well so they know I have skin in the game, and I am not trying to make a buck on their backs.

Ever received infinite returns (2-3% divided by $0 investment = Infinite returns) in ETFs or stocks? Ever received returns on money that YOU DID NOT INVEST?

Of course I make the risks clear to them, and explain to them the ups and downs of any investment and market. And granted, it took them a while before they trusted me. But now that I have their trust, and have never lost money for them, imagine what they plan to continue to do next.....

This is basically how i have built a portfolio of 4 rental properties in about 4 years and I am only 27. Not working 24/7, working smart ! 

I have never invested in stocks since I don't understand how to scale it.


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## secretly.lazy (Sep 17, 2015)

Berubeland said:


> Just about everyone who is not canadian agrees we are in a massive real estate bubble. 2nd and 3rd mortgages are a horrible idea. I have some clients who are taking out helocs on their rental properties and doubling down on 2nd and 3rd mortgages.
> 
> Risky business holding the paper on a descending asset class. Of course if you're comfortable catching a falling knife go right ahead.


Let's not even go there. The trick is not to be afraid of the rain and not go outside and play.
The trick is to use an Umbrella.

If it is a hurricane (around 50%) drop in Real Estate values, no Umbrella can help. do you really think your stocks and ETFs are safe? Everything is connected in this global economy. 

Secondly, what I mean by the umbrella analogy is that one should not invest and "hope" that the market stays intact. Instead, build the deals in such as way that you are protected against the downside risk. So if the market does drop, you are not affected upto a level.

For example, I am protected against a market drop of 15-20% for 2 out of my 4 rental properties and 100% protection for my 3rd rental property. If you investigate and research hard enough, you will find many ways to protect yourself from the market downside (upto a level). This is essentially what hedge fund managers do.

The only other option I see is sit on your cash and keep on hoping and moaning about the market. I do not have a crystal ball. Hence, my approach is to think of a reasonable worst case scenario (such as a 20% market drop), and ensure I am protected against it. That helps me sleep at night, and keeps my $$ working hard.


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## gt_23 (Jan 18, 2014)

Berubeland said:


> Just about everyone who is not canadian agrees we are in a massive real estate bubble.


I just checked my econ textbook for the definition of real estate bubble and it states that everyone who is not Canadian must unanimously agree that Canada is in real estate bubble for there to be a real estate bubble. Please continue your crusade and update us when that is in fact the case.


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## Mortgage u/w (Feb 6, 2014)

I am a lender (not private) and underwrite deals every day. The insight I can give you is that no matter how much you scrutinize your borrower's history and credentials, there is no analysis to prevent bankruptcy, divorce, death or loss of income. Remember, clients will tell you what they think you want to hear. So if they have a gambling problem, addiction or family issue, they will withhold that info. Their credit may be solid, have a stable job, etc., but one bad move and they default big-time. If they are seeking a 2nd or 3rd mortgage, there is usually an underlying issue.

What I suggest you look for in order to minimize risk is 1- purpose 2- location/marketabily and 3- LTV. 
My personal opinion is to do 1st lien mortgages. Offer a lower rate (10%) and short 12mth terms. May be harder to find but nothing beats being in control of a solid collateral. 9 out of 10 mortgages in 2nd rank loose everything when the 1st lien holder decides to call back the mortgage. Try to stay in the 65% LTV range and don't go in rural areas. Get yourself a solid appraiser. These guidelines will supersede any risk associated to credit experience or job stability when underwriting the loan.

Lastly, if its for debt consolidation, I would stay away. These people tend to re-endebt themselves until there is no more equity and finally bust. Check the title to see how many times client refinanced. If its the first time, then the risk is lower. Instead, look for reno loans or transition loans such as a client needing the down-payment on a new home waiting to sell theirs. You know these are short term loans and client has no intention of defaulting if he has a good track record. If you have good penalty clauses, then you actually want these clients to default. You force them to either sell or seek another loan for payout and you cash in way more than the 10% interest rate.

Good luck!


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