Becoming the Bank
Investing today can be a challenge, given the low interest rates offered by banks and the volatility of the stock market. Many people, as a result, are turning to real estate as a source of opportunity, serving as private lenders. Instead of putting their money into a bank account to yield returns, they are BECOMING the bank: lending to people who need money for home purchases, renovations or refinancing.
If you are interested in investment alternatives, The Wilson Team of Mortgage Experts is your one-stop shop for opportunities. We at the Wilson Team can guide you through the ins and outs of private real estate lending, either as an individual lender or a member of a mortgage investment company. As with any investment, there is always risk, but the Wilson Team works to find you the safest possible channels for your money.
Private Lending Explained
As a private lender, you essentially become the bank – the direct lender — for an individual or a company seeking funds to finance a home purchase or property development. You loan an applicant a specific sum of money at an agreed-upon rate of return for a specific time frame. Often, direct lending is a short-term proposition, tiding over the borrower until he or she can obtain a loan from a traditional institution.
Anyone can become a private lender, as long as they can access the necessary cash to loan. There are no courses required and no license necessary.
Private lenders charge higher repayment rates than banks, because they generally deal in loans for properties or applicants that banks find unacceptable. Given stringent bank loan requirements today, this leaves many potential borrowers out in the cold, so private lenders fill the gap. This means you’ll get a higher return on investment than you would from a savings account, bond or many stocks.
Direct lending is very flexible. You determine how much money you want to loan and what timeframe for repayment you require. You can request monthly payments or a lump sum at the end of the loan’s term. You also get to decide whether or not to lend funds to a particular applicant.
Or, if you prefer not to take the risk alone, you can become part of a mortgage investment corporation, or MIC, investors that form a group in order to invest in residential mortgages.
Another option is the real estate investment trust, or REIT. A REIT is a company that owns or finances income-producing real estate properties. Investors buy shares in publicly traded REITS and their funds are used to buy or manage properties. REITS can own or invest in a variety of income-producing properties; most of their purchases are commercial.
Finding Investment Opportunities
If you are interested in private lending options, you’ll probably want to work through a mortgage broker, like the Wilson Team. There are online networks for finding loan applicants, but it is advisable to work with a group that understands mortgage details and can administer it for you.
You’ll also need a good lawyer to put the contracts together, and the Wilson Team has access to a number of skilled professionals.
Who Are Private Lenders?
All kinds of people become private lenders; the common thread linking them is that they have extra cash available to invest. Examples include:
- Physicians, dentists, lawyers or other professionals;
- A retiree seeking passive investment income; or
- Owner of an estate or trust fund.
Nonstandard Additions to the Agreement
Nonstandard additions to the agreement should be discussed between the lawyer and client. For example, whether or not the purchase is conditional upon the purchaser’s sale of his own home or conditional upon the purchaser’s obtaining financing is important. When representing the vendor, it is important to continue to allow the vendor to offer the home for sale so as not to take the property off the market. What assets are included with the purchase (i.e. fridge, stove, etc.) and fixtures not included have to be identified. The purchaser may insist upon the right to have a building inspection done on the property and would make the purchase conditional upon receiving a satisfactory report.
Who Are Potential Borrowers?
One of the most important problems involved in the sale is whether or not a survey exists that is reasonably up-to-date. If there is no additional clause to the agreement the purchaser would be responsible for obtaining such a survey which currently costs approximately $1,000.00. If the clause was inserted it would be the vendor’s responsibility.
We will respond to any pertinent requisitions received from the purchaser’s lawyer. Any title problems revealed from the requisition letter must be solved before closing. Normally these problems are rectified between the lawyers without any difficulties. The client will be advised not to cancel insurance on the property until the day after the transaction has been completed and if necessary we will obtain a release from the mortgage company to allow the policy to be cancelled.
As a direct or private lender, you’ll encounter borrowers who want money for a variety of purposes, including:
- Purchase/Live. A buyer may want to own a home, but has a poor credit rating or a job whose income fluctuates, making traditional lenders reluctant to loan them money.
- Reno/Sell. The investor wants to buy a property with the intent of renovating it and selling it.
- Reno/Rent. The investor wants to purchase a property to renovate and rent out in order to have a regular cash flow.
- Builders/Developers. These investors buy vacant property to develop, speculating that their finished product will sell/rent easily.
While you can technically lend money to borrowers across Canada, it is advisable to start with local applicants. You probably know your own market best and will have the opportunity to meet with applicants directly, which may be a source of reassurance as you begin your lending career.
The Wilson Team can point you toward potential borrowers in your area.
Take the Plunge
If you’re interested in diversifying your investments, are interested in real estate or want to escape the ups and downs of the stock market, private real estate lending could be perfect for you. Contact the Wilson Team of Mortgage Experts to get started. We’ll steer you in the right direction.