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Investors
in private mortgages must be willing to take risks. They must
be willing to become involved in the investment process and must
know what their tolerance to risk is. They should not simply rely
on the recommendation of a lawyer, a real estate agent, or a mortgage
broker when entering into a transaction. They should fully understand
what they are getting involved in before they agree to invest
their money in any transaction.
Investors
must choose what sort of real estate they are willing to finance
because this real estate will be the security for their investment.
For those unfamiliar with mortgage financing it would be prudent
to invest only in residential or recreational properties. Making
an investment in a commercial transaction can be much more complicated
and much riskier. A good rule of thumb is to invest only in a
geographical area that you are familiar with and visit the property
before you decide to make your investment.
Yields
on mortgage investments will be determined by risk. The higher
the risk, the higher the yield. In todays market you can expect
a yield of 10% to 13% for a moderate level of risk. Minimum investments
of $10,000 are required for private mortgages.
The
typical borrower who needs private financing would be a self employed
individual or someone who may have had a bad credit history in
the past. They may have a substantial cash downpayment available
but don't meet the stringent underwriting criteria of the banks.
Another area where private funds are used is for cottages. The
banks shy away from properties that are not inhabitable year round
but if you are familiar with the area you may have no problem
making such an investment.
Private
mortgages can also be held in a self directed RRSP. Mortgages
are an ideal RRSP investment because they earn interest income
that can be sheltered within the RRSP. If you were to invest in
a mortgage outside of your RRSP your interest income would be
taxed at your full marginal tax rate, thus lessening the benefit
of your investment.
In
summary, private mortgages can be a very rewarding form of investment
but they are very much a hands on investment. You must be willing
to take the responsibility to choose the investment that meets
your needs and your tolerance to risk.
If
you are interested in making an investment in private mortgages,
or would like more information, please contact Andy MacDonald
at 1-800-203-4711 or by email at Andy@MortgageBrokerInc.com.
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