Private lending (arm length)

[llee]

Hi,

I was presented with a company that helps investors find borrower seeking private lending, analyze the deal and do paper work on your behalf. They collect monthly payment electronically, provide annuaal interest letter, follow up with delinquent payment on investor`s behalf, etc.

The borrower will be on 2nd mortgage. In their example, the company charge the borrower 15%/a on the money, and return 13%/a to the investor.

Amount of Loan: $50,000
Lender`s Interest rate 13%
Admin fee: 2%
Borrower`s Interest rate 15%
Monthly payments (from Borrower) $625.00
Payout to Investor: 541.67

Lender`s Commitment fee $2500 (deducted from the $50,000)
Lender`s Solicitors / Mortgage agent Fee (to be deducted from $50,000)

At the end (usually 1 year term), the investor (ie lender) gets the $50,000 back.

Does anyone have experienced dealing with private lending firm (with arm length mortgage) in general? It looks like they`re not charging a lot for admin fee (just like typical mutual fund MER).

Thanks.

 

[Architectus]

Hello,
I don`t know much, but it sounds interesting. Would you be able to let me know the name of this company?
I`m looking for some borrowers myself.
Thanks!

 

[RobMacdonald]

That`s acutally a little high than some private lenders. You need to be cautious with the LTV they will go for. Most private lenders are only going to 75% LTV, so you still need 25% into the deal. The return is similar to many Mortgage Investments Corps that are out there.

 

[Architectus]

Do you know any good private lenders in Calgary?
Thanks!


QUOTE (RobMacdonaldCMT @ Apr 30 2009, 01:01 PM) That`s acutally a little high than some private lenders. You need to be cautious with the LTV they will go for. Most private lenders are only going to 75% LTV, so you still need 25% into the deal. The return is similar to many Mortgage Investments Corps that are out there.

 

[kboughen]

QUOTE (llee @ Mar 26 2009, 10:58 PM) It looks like they`re not charging a lot for admin fee (just like typical mutual fund MER).
If you are the borrower in this situation, I would be very cautious. If I understand the numbers correctly, your effective annual Interest rate is 26%, and you would need a 29% annual return on the invested funds just to break even. Here is how I read the numbers:

$50,000 – 2% admin - $2500 Commitment fee - $2000 Broker and Legal = $44,500 in net proceeds.

When you add the fees above ($5,500) to the interest costs at 15% ($7,500) you have a total one year cost of $13,000 for the $50,000 loan, equal to an annual rate of 26%.

You would need to get a 29% annual return on the $44,500 just to break even.

 

[Thomas Beyer]

QUOTE (llee @ Mar 26 2009, 08:58 PM) ...
The borrower will be on 2nd mortgage. In their example, the company charge the borrower 15%/a on the money, and return 13%/a to the investor. ..
yes .. this would be a typical short-term lender deal .. nothing unusual !

Keep in mind that some lenders prefer that borrower not pay them back i.e. would love for borrower to default so they can take the property back.

Also note that after all fees are deducted the net cost is well over 20% .. so this makes sense usually only for a development deal or very short term bridge financing in a rental property with significant, short-term and proven rental upside before a re-finance is done. is this the case here ?

One such company is Liberty Investment in Calgary and I have invested 2x with them .. one loan paid out in full with 13% interest (or so) .. and one where there is the possibility the note holders (i.e. me and 80 others in this syndicated loan) become now land co-owners in Kelowna .. so yes there is risk commensurate with the return promised !

 

[freemanyee]

QUOTE (llee @ Mar 26 2009, 07:58 PM) Does anyone have experienced dealing with private lending firm (with arm length mortgage) in general? It looks like they`re not charging a lot for admin fee (just like typical mutual fund MER).

Thanks.


There are a number of ways to invest in mortgages - here are three:
1) You`re the lender on a single property, with your name registered on title as the mortgage lender. You take all the risk.
2) You`re one of a number of lenders in a "syndicated mortgage" on a single property, where you may own shares in an entity, and the entity is the registered mortgage lender. You share the risk with others, but would have to co-ordinate if you need to foreclose.
3) You own shares in a pool, which is the registered mortgage lender on a diversified portfolio of properties. Managers do everything for you, and your risk is spread out.

Returns can range from
- high single-digits for conservative loan-to-value ratios (say under 75%)
- low-to-mid double-digits for 2nd/3rd mortgages at high LTV`s
- in the 20% range if you`re lending more than the property value, and the owner is a developer who plans on increasing the value to be beyond the balance of the mortgages.

As rates go up, so does risk.

That said, investing in mortgages can be seen as "safer" than owning property, especially in soft markets. Mortgages get paid before owners do.

Feel free to contact me directly if you want to discuss further. I`ve been investing in mortgages from RRSP`s and lines of credit since the early 1990`s.

 

[GarthChapman]

QUOTE (Architectus @ May 1 2009, 10:46 PM) Do you know any good private lenders in Calgary?
Thanks!

I do, and have money invested with them. Send me an email with some details on what you are seeking.