Private Lending: An Alternative Investment Strategy During a Time of Crisis

COVID-19’s impact on businesses, communities and individuals has already been drastic and we are still feeling the effects on a daily basis.

During times of market uncertainty such as The Great Depression & Financial Crisis of 2007/8, people often search for alternate strategies to grow their wealth. Historically speaking, Real Estate responds to recessions with much less volatility than other investment strategies. 

Although investing in real estate may seem more cumbersome to you, consider how you may feel knowing there is a way to invest and manage your money in real estate, without being a landlord.

Let’s discuss the approach of private lending in mortgages. 

What is Private Lending?

Private lending is a tangible investment in bricks and mortar. This investment strategy allows you to be the source of financing for a prospective borrower, as an alternative to the traditional mortgage lenders (banks and financial institutions). You are in essence making the money those banks or lenders would by offering a mortgage to someone else.  

This method of financing is used for those who are having trouble qualifying through traditional routes, or those who want quicker financing solutions, such as real estate investors. This can be a mutually beneficial solution for all parties with minimal risk – if executed correctly. It allows you the lender to earn excellent returns on your money, while giving the borrower options that are not available in traditional channels. 

What is your role & responsibilities as a lender?

1. You are responsible for finding & approving deals. This can be done directly with borrowers or can be facilitated by a Mortgage Broker. Part of our role in the process is to find and underwrite private deals and do initial pre-screening of borrowers. Here is an example of one of our most recent opportunities. https://view.attach.io/s01WB6GI8

• Transfer Funds. Once you have approved an opportunity, you will transfer funds through a lawyer’s office to complete the transaction and getting added onto the title as the mortgage holder. You can use registered funds such as RRSP, LIRA or TFSA funds as long as they are held in a self-directed account or of course cash and a secured line of credit. 

1. Accept Payments. Over the course of the term you will accept payments from the borrower. Generally, these are “interest-only” monthly payments. 

• Repayment or Renewal. At the end of the term the borrower will either execute on their predetermined exit strategy and pay you back or you may approve a renewal. One of the added protections in working with a Mortgage Broker is our ability to help facilitate the exit strategy smoothly. We work every day with our borrowers to insure they are on track to execute on their exit strategy. 

What are some of the advantages of Private Lending?

1. Return on Investment

The general overall return on 1st mortgages is 10-12% while the overall return on 2nd mortgages averages at 15% annually. These are very competitive returns, especially considering current market volatility. 

Below is an example of the significant growth to your net worth you can expect to see using $100,000 of current liquid assets (via The Windrose Group’s, Private Lending program):

Example 1: 1st Mortgage Position using $100,000 invested in mortgages:

Example 2: 2nd Mortgage Position using $100,000 invested in mortgages:

2. Security

It’s important to remember that nothing is 100% safe, secure and guaranteed. The same with any investment strategy. Knowing that your investment is secured through real estate is a great added piece of mind. 

Our extensive approval process & understanding the borrower’s character, goals and their reputation are additional bonuses that give you confidence in your investment choices.  We will answer the following questions before you move forward:

1. Why is the borrower utilizing private funds and not the major banks?
2. What are they going to do with your funds and how do we control that?
3. How are they going to pay it back also known as the exit strategy?
   

Our team also provides you with these three things to help give you some added security and peace of mind in the process:

• As illustrated previously, you receive a complete Investment Opportunity Package to determine if you are happy with the real estate and borrowers before you loan any money 
• For registered funds, you receive monthly trustee statements to track your returns
• You are named on the Property Title, the Property Insurance Policy and the Title Insurance Policy as a Lender – no different to how the major banks are now.  This means that if a default occurs, an insurance claim or the property is sold, you are a priority to be paid out. 

3. Building a Partnership 

Private lending allows you the opportunity to get further insight into who & what you are investing indirectly while being secured against bricks and mortar, as opposed to investing into a faceless corporation. This can develop into a meaningful hands-off partnership with your borrowers and can give you a greater sense of control over where YOUR money is being invested. 

What are the disadvantages?

Of course, it is important to navigate risk before you make any changes to your portfolio. 

In this case, you will have to collect mortgage payments, you may have to deal with default of payments and potentially legal action including foreclosure proceedings. 

Working with an experienced mortgage brokerage, such as The Windrose Group, will greatly mitigate the risk on your behalf. We pride ourselves in our thorough screening and underwriting process prior to presenting any deals to a potential lender. 

We are hands on so you can be hands off; we are constantly communicating with the borrower on your behalf. We are always striving to make your passive investment in real estate as stress free and hands off as possible.

What’s Next?

Measure the pros and cons of private lending to determine if this strategy might work for you. If you’re unclear or in need of more information, reach out to determine whether or not this investment method is beneficial for your situation. 

Additionally, we have put together a comprehensive guide to navigating your finances, future and more during the COVID-19 pandemic. Feel free to reach out to us for more information.