I hold several private mortgages. They can be very lucrative and a nice way to provide diversification to an established portfolio.
My thoughts:
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.