I hold several private mortgages. They can be very lucrative and a nice way to provide diversification to an established portfolio.
1. Have a solid understanding of the market that you are investing in. REIN Gold Mine Score Card is a good starter.
2. Don't be awed by the optics of large developers/large developments. They are paying you a premium because the venture is risky and, as such, it demands it. And you would be surprised by the number of developments that actually go bankrupt. In Waterloo, I know four that I can think of - right off the top of my head.
3. Don't rely on the appraisal report. If you need an appraisal report to tell you its a good deal, you don't understand the market enough to invest in it.
4. If the deal is being brokered by a mortgage broker, have him explain the exact process in the event of default.
5. Ask what support the mortgage broker provides in the event deal goes sideways. My mortgage broker contacts the borrower and is in constant contact with my wife when things go amiss.
6. Make sure you negotiate some good upfront loan set up fees.
7. Make sure you negotiate some good loan default fees.
8. Understand that the higher the interest rate, the higher the risk. That's how this product is priced.
9. Try to envision the worst case scenario - the borrower simply goes into default.
10. All costs, legal, appraisal and otherwise are paid by the borrower.
11. Make sure that you can still sleep at night if your investment goes sideways. I can. Its just play money for me.
Right now, in my market place, I am seeing 8% firsts, and 12%+ seconds.
I borrow private mortgages and I lend private mortgages. Some mortgage brokers specialize in lending private mortgages. Talk with a few mortgage brokers and get on their list for when they need a lender.
When lending a private mortgage a question I ask myself is:
-Would I be willing to buy the house for the total balance of the loans? (ie. would I buy it, renovate it, sell it, then be happy with the result?)
Some other notes:
-I like lending on fixer uppers because I understand them and there is room for the value to be increased with renos. I've seen many pretty houses get de-valued quickly when people who are rough on houses move in (ie. kids, pets, punching drywall, lack of maintenance & cleaning, etc)
-be cautious of appraisal values. Some appraisers can be easily influenced to give a higher value to make the home owner or lender happy. Other appraisers always appraise low.
-Do your own due diligence: get a realtor to give you comps for the house. Don't just blindly believe the appraisal. Compare the sqft of the subject house to the comparables using aboutmyproperty.ca
-if you're doing a high LTV second mortgage at 85-90%, then be very careful. Know what you're doing and have an idea of the costs that will eat away at the equity if things go wrong.