Private Mortgages - Do They Make Good Investments?

Investing money in private mortgages on commercial real estate  – UNDER THE RIGHT CIRCUMSTANCES AND AGAINST THE RIGHT PROPERTIES – can be an excellent investment strategy. As with everything in real estate, you must weigh the risk/return carefully, before tying up your hard earned capital.

Best practice is to consider the mortgage, much as a normal institutional lender would. You would want to closely examine the following areas initially:

·         Quality of the real estate (collateral)

·         Stability of the cash flow (both historically & moving forward)

·         Credit/Covenant of the borrower (credit score/net worth/character)

·         Loan to Value (LTV) Ratio ( 70% - 75% - 80%)

One of the earliest questions to consider – why is an institutional mortgage not available or possible? Chances are that it involves one or more of the above points. That should then help frame the ‘risk’ part of the deal – ie. if it’s a credit problem or possibly an LTV issue. Once you identify the risk, then you can determine whether or not the reward (return) side, justifies funding the deal.

Once the decision is made to ‘move forward’, then you enter into the due diligence part of the transaction. Typical details would include -- reviewing the most recent appraisals on the property, credit reports/employment letters on the borrowers, personal statements, property condition reports, environmental reports, and even title searches. Full disclosure of the facts surrounding the transaction is what you are after, and you almost adopt the position of the Buyer in doing so.  

Who should you involve? More than likely an experienced mortgage broker and a seasoned real estate lawyer for sure. The mortgage broker should help in the coordination of the due diligence process and all of the preliminaries. The lawyer then puts into place the actual mortgage document, ensuring your security over the term of the loan.

As always, it’s always a good idea  to consult with an experienced commercial broker in your area, when evaluating the risk/reward potential on a private mortgage.