3 Helpful Tools for Real Estate Investing
Who Supplies The Capital?
The capital is literally infused by investors who want to participate in real estate and earn a return on their investment. Investing in the Canadian mortgage market is a solid option for those who want to get into real estate yet not necessarily own the property.
There are a number of methods by which investors can supply you the funds for your project mortgage. A common investment vehicle is a MIC.
1.) Mortgage pools: Many investors prefer this type of investment as it allows an investor to participate with other investors in a pool or diversified gathering of mortgages.
The attractiveness of this structure is the diversification of risk for investors as their funds participate with other investors' funds and are spread or pooled among many projects. There are a number of Mortgage Investment Corporations (MICs) in Canada and many often participate in the same deals. It is conceptually similar to
a mutual fund in design but different in that your funds are secured by the real estate undering the investment. (If you are considering investing in a MIC, consult your financial adviser and legal counsel before doing so.)
Keep in mind, a MIC does not necessarily structure the mortgage; it simply accesses its pool of funds to participate in the lending on a deal.
2.) Syndicated mortgage: A syndicated mortgage is ideal for investors seeking a specific rate of return for a specific period of time. Where a MIC invests in a portfolio of mortgages, a syndicated mortgage is a group of investors investing in one mortgage at a time. The risk is slightly higher and the corresponding return is slightly higher on these funds.
Types of Real Estate
The essence of private lending stems from individual investors willing to lend their money on deals that typically fall out of bank lending parameters. In other words, there is a supply of funds in the capital markets with an appetite for this investment type.
While there are a multitude of reasons and parameters by which banks will not lend on certain real estate transactions, there exist a few common denominators which exclude the chances that a bank will lend their funds.
Having said that, these deals also are inherently risky and thus the reason the interest rates on these deals are higher. In order to accept this risk, private lenders and individuals (capital providers) expect a higher rate of return than what a bank would provide.
The most common characteristics of a deal:
* Short term funding requirements; to bridge the project until alternative financing is warranted. Very often, many real estate projects require short term funding as short as six months to as long as 24 months simply because of the design and nature of it.
These types of transactions are often development in nature or a form of project in which the real estate is forcing equity growth and value towards what is known as "highest and best use." This essentially means the real estate will be improved, changed or in some cases even destroyed in order to create the best value at a future point in time.
* The borrowing entity (person or group of persons) applying for the funds is limited in collateral, capital, experience, credit worthiness, or in some other way. Consequently, these perceived weaknesses may result in borrowers falling out of grace with institutional lenders. Assessing the entire package and considering alternatives and options is what a private lender does.
As an example: A borrower who owns land and wants to build on it may find that banks are unwilling to fund any or all of that deal because the asset is deemed incomplete. Private lenders specialize in construction financing and understand your intentions and goals.