How to Read Loan-to-Value Like a Pro

Loan-to-value (LTV) is likely the most discussed ratio in real estate lending and mortgage investment circles. Conceptually, it’s a fairly simple concept: the ratio of a loan to the value of an asset purchased with the proceeds of the loan. The ratio is the value of a debt that has been secured against a present value of an asset that has been offered by a borrower as collateral. If in the event the debt has not been repaid, the lender can seize the asset and sell it to satisfy the debt owed.

LTV correlates with the security an investment provides. The general rule of thumb is the higher the interest rate, the higher is the perceived risk of the mortgage investment. Thus, studying the LTV is a common way to assess risk. Let’s walk through how to read LTV like a pro.

Key Points

  • Borrowers often insist that their property is worth much more than a lender is willing to accept.
  • A lender always approaches a transaction with the conservative view that the potential borrower will default. It’s not a statement about the borrower; it’s simply how lenders assess debt transactions.
  • Values are always changing, and the underlying LTV calculations change with them. As the LTV ratio changes, so too does the risk profile of the mortgage investment. Lenders constantly monitor their original LTV calculations against actual LTV values as markets undulate forwards and backwards.

 

When Is Loan-to-Value Determined?

The LTV ratio is determined at the time the loan is advanced, meaning it’s fixed for the purpose of the loan. As time passes, the actual value of the securitized asset can go up or down. Once the loan is out the door, the value of the lender’s security is subject to the whims of the market. Regardless of which way the value goes, the lender is owed the same amount.

Borrowers often insist that their property is worth much more than a lender is willing to accept.

How Is the Loan-to-Value Determined?

The LTV ratio is the loan amount against the value of the asset. What the “value” of the asset is can sometimes be a difficult matter to determine and have parties agree upon. The borrower will want the asset to have the highest value possible, while the lender will want a conservative value—one that can be easily realizable in the event the lender is forced to sell the asset to pay off the loan.

Borrowers often insist that their property is worth much more than a lender is willing to accept. Lenders complain that borrowers are too greedy and fail to appreciate that the value of their property might not be worth as much as they think if a sale of the property is forced to repay the debt. This problem is most often satisfied by hiring an independent third party appraiser to assess the value of the asset being offered as collateral.

Realization (n): The amount received, in excess or loss, of the adjusted basis of the property.

What Is the Cost of Realization?

All lenders price with a mind to realization. A lender always approaches a transaction with the conservative view that the potential borrower will default. It’s not a statement about the borrower; it’s simply how lenders assess debt transactions.

How easy it is to sell the underlying asset goes directly to the cost of borrowing and will be reflected in the LTV. It may be wonderful to have a debt security on a property that is 40% LTV, but if you can’t sell the property, then it’s kind of meaningless.

The general rule of thumb is the higher the interest rate, the higher the risk of the mortgage investment.

How Is Loan-to-Value Related to Interest Rate?

A high interest rate can mean anything. Interest rates do not rise proportionally to the percentage LTV. The rate is generally determined by the market based on liquidity, the actual LTV as discussed, and the desperation of the borrower. A high rate of interest usually signals a high LTV ratio. However, LTV is a strictly relative value particular to a given market. What’s considered a very good LTV in one market may be horrible in the next.

Can Loan-to-Value Change?

The LTV calculation is generally done only once, at the outset of the transaction. It’s a thorough process that requires time, expense, and expertise. Yet, nothing stands still – markets rise, fall, and are subject to unexpected events. What one may have thought a very conservative investment may suddenly become a very risky investment given events beyond the lender’s/investor’s control.

Values are always changing, and the underlying LTV calculations change with them. As the LTV ratio changes, so too does the risk profile of the mortgage investment. Lenders constantly monitor their original LTV calculations against actual LTV values as markets undulate forwards and backwards.

We invite everyone to share in the opportunities that we create with our borrower clients.

How Do I Get Started?

Loan-to-value might seem like a simple concept to grasp, yet many investors have lost very large sums of money by investing in highly leveraged properties. Don’t let that happen to you! Before you invest in real estate, speak to a qualified advisor who’s an expert in mortgages.

At Fundscraper we review residential and commercial real estate transactions all the time — it’s our “day” job! We work closely with our borrower clients to make sense of the value propositions they advance and do the homework necessary to insure the LTV we determine based on the evidence in front of us is an accurate and safe assessment against which we are willing to risk our money. We can help you invest smarter. Contact us today to learn how mortgages and private real estate can be great investments.

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The Role of the Credit Committee of an Exempt Market Dealer

The Credit Committee, sometimes called the Investment Committee, is a panel of individuals ubiquitously found in financial institutions, pension and endowment funds, credit unions, banks, insurance companies, and the like. Here, we’ll focus on the role and inner workings of the Credit Committee of an Exempt Market Dealer offering real estate products to the public.

Key Points

  • An EMD is a firm that has been licensed to distribute investment securities that are exempt from the rigours of a prospectus normally required by the Canadian Provinces in which it is registered to carry on business
  • The Board of Directors of an EMD normally establishes the Credit Committee comprised of senior management individuals with authority and relevant skill and experience. They meet regularly to consider new investments and approve, amend or turn away investment opportunities being brought forward under the auspices of the EMD
  • The credit committee serves as a natural buffer or safeguard against an overly enthusiastic promoter. An essential part of its mission is to protect the ultimate consumer of products offered to the public under the umbrella of an EMD

What is an exempt market dealer (EMD)?

An EMD is a firm that has been licensed to distribute investment securities that are exempt from the rigours of a prospectus normally required by the Canadian Provinces in which it is registered to carry on business.

EMDs may act as dealers for prospectus exempt securities sold to qualified clients. Typically, an EMD offers products covered by an Offering Memorandum (OM) which need not be pre-cleared by a Securities Commission. An OM is an issuer-prepared document purporting to describe its business. OMs assist prospective purchasers in their decisions of whether to invest in the securities being offered by the Issuer.

The Credit Committee does much of the “heavy lifting” for investors in evaluating the underlying merit of any investment opportunity.

What is a credit committee and what does it do?

The Board of Directors of an EMD normally establishes the Credit Committee comprised of senior management individuals with authority and relevant skill and experience. They meet regularly to consider new investments and approve, amend or turn away investment opportunities being brought forward under the auspices of the EMD.

The Credit Committee has a broad range of duties and responsibilities, including the obligations to:

  • Ensure regulatory compliance for each investment
  • Review regularly investment policies and recommend to the Board of Directors changes in policies, procedures, internal controls and underwriting guidelines
  • Promote wise investment and credit management
  • Rule on investment opportunities, taking into account credit, market, operational and legal risks
  • Ensure any investment is consonant with the EMD’s published investment criteria and policies

What is a loan officer?

The Loan Officer assigned to any proposed transaction is an experienced underwriter charged with presenting the investment opportunity to the Credit Committee, including all the supporting research. An underwriter’s main task is to assess the quality of an investment, its sponsors, and its inherent risks. Oftentimes, the Loan Officer’s presentation to the Credit Committee will have been previously vetted and endorsed by the Loan Officer’s supervising manager.

Why is it called underwriting? The term comes from the historical practice of Lloyd’s of London Insurance of requiring each risk taker (often for a sea voyage with risks of shipwreck) to put their “written” signature “under” the total monetary risk they were willing to assume in return for a fee. Hence the term “underwriting.”

It’s the credit committee’s job to approve, amend, or disapprove of an investment application.

How does a credit committee evaluate an investment opportunity?

Over and above its general obligations, on a daily basis, the Credit Committee is charged with evaluating potential investment opportunities falling within the EMD’s jurisdictional orbit. The review begins with the Loan Officer’s discussion paper, which includes a profile of the people behind the deal, its proposed terms, detailed analyses, and recommendations.

After deliberating over the Loan Officer’s underwriting report and completing any follow up interviews, the Credit Committee can approve, amend, or disapprove of the investment application at hand.

If the application is turned down absolutely or with amendments, the Loan Officer will advise the applicant accordingly. If it’s approved, a letter of intent will be sent. Upon acceptance by the applicant, a term sheet and commitment letter prepared by the Loan Officer and approved by the Credit Committee is forwarded to the applicant for signature and acceptance. The Loan Officer then will confirm that all due diligence and funding requirements are in order and that arrangements are put in place to fund the transaction. The EMD’s Legal Counsel will be retained to prepare and register the mortgage and/or any other security documents and ensure all conditions have been satisfied before funds are released. Barring the need for an extension down the line, the work of the Credit Committee is now done.

At this juncture, the EMD moves on to fulfill its regulatory obligations and attends to matters related to qualification of investors, suitability, conflicts of interest, disclosure, and more. It’s a complex process; the full treatment of these tasks is beyond the scope of this paper!

The credit committee serves as a natural buffer or safeguard against an overly enthusiastic promoter. An essential part of its mission is to protect the ultimate consumer of products offered to the public under the umbrella of an EMD.

What is due diligence?

Due Diligence, as applicable, covers many things, including:

  • The credentials of an Issuer or Sponsor
    The financial details of the proposed deal, including principal amount, yield, duration, and other salient features and conditions
  • Creditworthiness of the borrowers and/or guarantors, including credit checks, financial statements, personal references, and net worth statements
  • Third party reports such as valuation appraisals, architectural certificates, environmental reports, building condition assessments, geotechnical appraisals, and quantity surveyor reports
  • Leases, rent rolls, and estoppel certificates
  • Development budgets and construction schedules
  • Ability of the originator to fund budget shortfalls and need for a Deficiency and Cost Over Run Agreement
  • Zoning and building permits
  • Details of prior and subsequent encumbrances and availability of lender consents, if necessary
  • Assessment of loan to value ratios and other compliance with the EMD’s investment criteria
  • Evaluation of current competing market conditions for similar deals, including prevalent offerings by competitors
  • Timing of advances to the borrowers
  • Availability of collateral security
  • Builder’s risk and liability insurance
  • Validity of repayment schedules, as well as feasibility of exit route through refinancing or sale of underlying property
  • Evaluation of originator’s track record and project’s progress to ensure continued sustainability in case an extended term is needed
  • Location of the property, including marketability, condition, and value
  • Contemporaneous assessment of general economic and societal forces, including state of financial markets, existing and proposed government policies, local issues, and force majeure conditions
  • Review of commitment administrative and all incidental expenses and fees
  • Legal structure and supporting documentation

Meet the Fundscraper credit committee

Our team has over 125 years of experience in real estate development, finance, private equity, law, and technology. We’re proud leaders in our fields! Meet the Fundscraper credit committee here.

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5 Important Considerations Before Investing in a Mortgage Pool

Key Points

  • Mortgage pools are attractive alternative investments, as their safety profile can be adapted to meet the investor’s appetite for risk.
  • Our first mortgage pool only invests in first mortgages, which means Fundscraper has a greater likelihood of being made whole on its investments in the event a borrower fails to repay its debt owed to the Trust.
  • Mortgage pools are typically more flexible in their lending terms and will provide shorter-term loans, generally ranging from 6-36 months, than those offered through traditional sources. It is because of this flexibility and the higher risk of these loans that they charge interest rates that are significantly higher than prime rates used by banks.
  • The general rule of thumb is the higher the interest rate, the higher is the perceived risk of the mortgage investment. One way of assessing risk is studying the loan-to-value.

Risk Tolerance and Investment Goals

Risk-averse investors should look for a mortgage pool that is lower in risk. The riskiness of a fund or pool can be judged by its underwriting criteria, which is usually described in the offering memorandum. If income and preservation of capital are your goals, pick a pool that has conservative underwriting criteria and consistently delivers good returns. Learn more about our underwriting criteria here.

Our first mortgage pool only invests in first mortgages, which means Fundscraper has a greater likelihood of being made whole on its investments in the event a borrower fails to repay its debt owed to the Trust.

Mortgage Portfolio Composition and Concentration

A mortgage is registered on a landowner’s title to the property. This registration is called a charge. The charge details the interest of the lender, namely what is owed to the lender by the landowner, and that if the landowner fails to pay, then the lender may take the property and sell it to satisfy the debt. The lender who is first to register its charge is the first entitled to be repaid.

Mortgage pools are typically more flexible in their lending terms and will provide shorter-term loans, generally ranging from 6-36 months, than those offered through traditional sources. It is because of this flexibility and the higher risk of these loans that they charge interest rates that are significantly higher than prime rates used by banks. While the loans may be initially structured as short-term loans, they typically get renewed multiple times turning into multi-year mortgages.

The terms of the mortgages within the Diversified First Mortgage Pool vary between 6-18 months with borrowers having an option for renewal.

You should be wary of mortgage pools that have a high concentration of mortgages in one geographical location because it is more sensitive to adverse local economic and real estate conditions. Our Diversified First Mortgage Pool invests in single-family and multi-family residential assets in established neighbourhoods in southern Ontario.

Loan-to-Value of the Mortgage Portfolio

For most mortgage pool funds, a loan-to-value ratio of 70% is considered conservative (banks typically lend at a max. loan-to-value ratio of 75%). This means that the amount of the loan cannot exceed 70% of the property’s value. The difference between the loan and property value creates a safety cushion that protects investors from losses in the event of a borrower default that triggers a foreclosure and sale. Get a crash course on loan-to-value here.

The general rule of thumb is the higher the interest rate, the higher is the perceived risk of the mortgage investment. One way of assessing risk is studying the loan-to-value.

Fees and Expenses

Investors in mortgage pools sometimes pay higher fees that can reduce the payout amounts to you. Fees paid to the manager can be high and can include management fees, performance fees, and mortgage origination fees. On top of these fees, the operating expenses of the mortgage pool are also funded from investor money. This means that a manager can earn a higher return than investors through the different types of fees.

Our First Mortgage Pool has a 1% management or mortgage servicing fee and the fee details are disclosed in our offering memorandum.

Compliance

Fundscraper Property Trust must comply with the rules of government agencies, which are described in its disclosure documents. The principal document is the offering memorandum, which contains information regarding the Trust’s structure and objectives and management team experience. Fundscraper Capital Inc., the promoter of the Trust, is strictly regulated as an Exempt Market Dealer.

Have more questions about investing in a mortgage pool? Still not sure what all of the financial lingo means? We’re here to help! Schedule a call to talk through your real estate investment options today.

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6 Achievable Ways to Earn Passive Income from Real Estate

When you think of the words “passive income,” people often picture a man or woman sitting on the beach with a margarita in hand, watching their bank balance rise. However, unless you stumbled into a large inheritance, for most people, this is not reality. Passive income, like all forms of income, requires time and effort — it doesn’t just happen overnight! Now that we’ve squashed your financial fantasy, let’s talk about what passive income really is.

Key Points

  • One of the biggest benefits of real estate investment is that it’s a source of passive income. Our team put together a guide on the different ways to get started. It’s time to make real estate investing your new side hustle!
  • Income can be divided into two main categories: Active and Passive.
  • Unlike REITs, where your investment is placed in physical properties, with a MIC, your investment is placed in property mortgages.

Active Income vs. Passive Income

Income can be divided into two main categories: Active and Passive. Active income is earned by exchanging services — including wages, taips, salaries, and business income — for money. Passive income is divided into two subcategories: real estate and portfolio income. Unlike active income, passive income requires little to no involvement in the generation of income and is typically earned on an ongoing basis.

Understanding that everyone has different preferences, needs, and risk tolerances, we’ve compiled a list of ways real estate can help you earn passive income to achieve your investment goals.

Real Estate Investment Trusts (REITs)

REITs are one of the most popular real estate investment vehicles amongst Canadians and come in many shapes and sizes. They’re trusts that passively hold interests in real property, with at least 75% of the trust’s revenue coming from rent or mortgage interest from Canadian properties, as well as capital gains from the sale of such properties. Modelled after mutual funds, REITs are the next closest thing to owning real estate and finance a wide variety of buildings, including many shopping malls, office buildings, and apartment complexes.

Unlike traditional mortgages, REITs offer broad diversification with both equity and debt investment opportunities. Equity REITs derive most of their revenue from rent collection and can be found on both the public stock exchange, as well as in public non-traded and private markets. Debt REITs earn most of their money from interest earned in their investments in mortgages and mortgage-backed securities and tend to do better than equity REITs when interest rates are rising.

Unit Trusts

Many Canadians use unit trusts as structured vehicles to invest in real estate and share returns. By investing into a unit trust, your investments are handled by a fund manager who then uses its expertise to invest your money into a portfolio of assets. At Fundscraper, this is our bread and butter, with the Fundscraper Property Trust (FPT) offering Canadians the opportunity to invest in pooled mortgages. Pooled Mortgages consist of one or more mortgages that offer a similar return and loan-to-value ratio, meaning that you can invest in numerous mortgages that align with your risk appetite through one transaction. Our investors earn a monthly return between 6-11%, without having to lift a finger or visit a property. Intrigued? Learn more about the Fundscraper Property Trust here!

Mortgage Investment Corporations (MICs)

MICs offer investors an opportunity to pool their money and buy shares in their MICs. Since they invest directly in mortgages rather than property, MICs are less susceptible to the same unforeseen issues that may arise in physical properties. Additionally, a MIC may invest up to 25% of its assets directly in real estate, but may not develop land or engage in construction, and must have at least 20 shareholders.

Unlike REITs, where your investment is placed in physical properties, with a MIC, your investment is placed in property mortgages.

Mortgages

For many, the “M” word can seem like more of a burden than an investment. But in reality, it’s an investment into what a building owner needs to buy a home. Homeownership allows you to build equity and in many cases, real estate will appreciate, depending on the local market conditions. Investing in a mortgage, especially someone else’s, means that you are essentially taking on the role of a lender and the borrower must repay the loan with interest, usually each month. If chosen properly, these monthly principal and interest payments can offer a steady and predictable stream of income.

Mortgages are the most common and significant type of debt held by Canadians. Approximately 40% of Canadians have a mortgage.

Syndicate Mortgages

Syndicate mortgages have two or more investors investing in one specific mortgage, pooling their resources together to own a “piece of the pie.” When you invest your money into a syndicate mortgage, you become a secured lender and are recognized as a part-owner of the mortgage. It’s a fairly straightforward arrangement, and investors hold in proportion to what they contributed.

While it can be a great investment opportunity, it’s also important to note that there is no guarantee that the project will pay off. Syndicate members are generally expected to be sophisticated mortgage investors as they are not relying on the efforts of anyone else for a return on their investment. Investing in mortgage syndicates is for experienced mortgage investors only!

One of the oldest real estate “plays” is buying an additional property to earn passive income.

Buying Income Producing Properties

Whether it’s buying a student house in a university town or renting out a duplex in a residential area, owning a property can be lucrative, but typically requires lots of planning, management, and a large down payment. Standard bank financing will typically top out at 75% loan-to-value. While property management isn’t for everyone, for the few willing to do the homework, owning and managing an income property can complement an investment portfolio geared to generate income.

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Due Diligence Checklist Before You Invest in Private Real Estate

Today, there’s a wealth of options for accessing the market for investors of all kinds. Many investors struggle with the private real estate investment due diligence process. It can be intimidating and stressful to know where to start, what information to review, and how to determine whether or not a property is a smart investment. We’re here to make that process a lot less intimidating by explaining essential due diligence to-dos for investors, whether you choose a fund, service, or platform.

Key Points

  • Many investors struggle with the private real estate investment due diligence process.
  • Past performance does not guarantee future results, but looking at track record is one way to gauge an organization’s expertise.
  • Make sure you understand a service’s fee structure and confirm that it makes sense in light of the value the investment manager is creating for you using your capital.
  • People turn to real estate to improve their portfolio’s overall diversification. Public REITs are terrific products, but if your investment portfolio is generally made up of publicly tradable shares, you may lack diversification.

See If You Qualify

Before spending too much time envisioning your future with a particular service, be sure to check and confirm which kinds of investors it admits. For example, some funds provided by famous private equity real estate companies, like Blackstone, have a history of only admitting investors that meet certain salary thresholds, while newer platforms, like Fundscraper through Fundscraper Property Trust, allow anyone to invest.

Check Past Performance

Past performance does not guarantee future results, but looking at track record is one way to gauge an organization’s expertise. How has the manager fared in prior years? Did they show responsible custodianship over investors’ funds in the past? What does their portfolio say about their investment biases? How is their portfolio weighted? Each of these factors can help you determine what your investment experience might be like with a particular service.

 Due Diligence Checklist Before You Invest in Private Real Estate

Understand the Fee Structure

Every real estate investment has built-in expenses. In order to generate dividends, a property incurs ongoing fees, such as property management and future upkeep. Make sure you understand a service’s fee structure and confirm that it makes sense in light of the value the investment manager is creating for you using your capital.

Make Sure You Can Manage Your Investment

One of the big advantages of investing in real estate directly is that you never have any doubt about what your money is up to or how to track it. On the other hand, when you invest through a third party like a fund, partnership, or corporation, you can only track what they make visible. Now that most investment services are online, make sure you can interact with, manage, and evaluate your investment to your desired level of involvement.

 Due Diligence Checklist Before You Invest in Private Real Estate

Consider Diversification

People turn to real estate to improve their portfolio’s overall diversification. Public REITs are terrific products, but if your investment portfolio is generally made up of publicly tradable shares, you may lack diversification.

Public REITs in Canada correlate very closely with our public markets. When the markets go up, so do the REITs; when the markets go down, the REITs follow. Private real estate investment does not correlate with the public market. It’s one of the important reasons folks look to “anchor” their investment portfolios with private real estate investment. It sits at the bottom of your portfolio and chugs along, regardless of what’s happening in the public markets.

At Fundscraper, part of our due diligence is making sure you understand yours. Download our due diligence checklist template for real estate property investment here.

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How to Invest TFSA

Private real estate investment is too often overlooked in an investment world dominated by hedge funds, ETFs, Principal Protected Products, publicly traded shares, and bonds. If you think private real estate investing is only for the wealthy or experienced, think again. Many people don’t realize they can invest their tax free savings account (TFSA) dollars in private real estate. 

Key Points

  • Many people don’t realize they can invest their TFSA in private real estate. We put together a guide to walk you through the process and show you how to invest with a TFSA.
  • Private real estate investing is for everyone, especially because you can use your TFSA to invest and you don’t pay taxes on your profit!
  • Investing your TFSA in private mortgages is easy! Nevertheless, it’s important to have your advisor orchestrate the process on your behalf, as there are moving pieces that have to be coordinated.

What Is Investing with a TFSA?

Private real estate investing is for everyone, especially because you can use your TFSA to invest and you don’t pay taxes on your profit! In fact, TFSA investing is an affordable, approachable way to get started. Not sure how to invest with TFSA or what that means? We’ll explain.

How to Invest with TFSA

Real Estate Investment Trusts (REITs): Investing with a TFSA

The majority of Canadians hold their retirement savings in registered accounts at major financial institutions. When folks open a TFSA they normally invest in stocks, bonds, mutual funds, exchange traded funds, and other public securities that trade on public stock exchanges. Many people believe that is all they can invest in through their TFSAs. But stocks, exchange traded funds, and the like only scratch the surface of what’s possible.

Most people don’t realize they can invest in private mortgage investment entities like mortgage investment corporations (MICs) and mortgage trusts, as well as mortgages directly, with their TFSAs. If you’re interested in doing this, we can help.

Not everyone knows how to invest TFSA funds. Interested in investing through TFSA? Fundscraper can help.

Investing with a TFSA in Mortgages

If you’re interested in investing with TFSA in private mortgages, whether directly or through a mortgage investment entity like a MIC or mortgage trust, the first thing you should do is seek expert advice if you have little experience in the private mortgage markets. The process of direct investing TFSA is not difficult, but if you’ve never done it before, you’ll need an expert to walk you through your due diligence. That’s what we’re here for!

Do you qualify? Find out your investor eligibility here.

Your advisor should be a registered mortgage broker or an exempt market dealer focused on mortgages. At Fundscraper, we’re both. We begin by asking about your investing experience, investment portfolio to date, risk appetite, expectations, current needs, and future needs. This is called a suitability assessment, and it helps us determine whether private real estate is an appropriate investment for you at this juncture of your life. If yes, the next step is identifying a mortgage investment product that would be suitable for you.

Investing Through a TFSA in Commercial Properties

Your tax-free savings account is very flexible. First, determine your TFSA contribution limit. This is very important and easy to do. It’s important because you cannot invest more than the limit CRA imposes on your TFSA account. It is easy to find out what your maximum contribution limit is by going to your “MYCRA” account. You’ll find out there how much available room you have to invest in a TFSA in any calendar year. Unused amounts from previous years are carried over!

Once you know how much you can invest, you’ll need to know what investments qualify for your TFSA account. CRA provides a handy schedule of qualified investments for all registered accounts, including TFSAs, here: Qualified Investments for Registered Accounts. In this schedule, you’ll find that in addition to stocks and bonds, there are other types of investments such as mutual fund trusts and corporations, and special investment vehicles like MICs. If you want to hold a mortgage in your TFSA, you’ll see that certain “debt obligations” also qualify for your TFSA. You cannot hold property directly in your TFSA.

After you make contributions to a TFSA, the investment income that accumulates may be withdrawn by you tax free.

How to Invest with a TFSA Through a Private Limited Partnership

There are two ways to make an investment through your TFSA account.

If this is your first time, you will do the following:

  1. Visit a bank, trust company, or credit union and ask to open a “self directed” TFSA account.
  2. Once the account is open, deposit the amount of money you wish to invest into the account.
  3. Next, you have to instruct the account what to buy. To do this, the financial institution will provide you with a “payment direction” that tells the financial institution, on behalf of the TFSA account held by the financial institution, what security to buy.
  4. The financial institution will then purchase the security on behalf of the account pursuant to your instruction.

You may already have a TFSA account at a big bank. If you do, that account is likely capitalized with big bank sponsored products like big bank mutual funds and ETF. Once we have found something that is suitable for you, and you know precisely how much you need to make your investment, you will need to contact your big bank account manager. If you want to use what’s there to fund your private mortgage or investment fund investment, you have to take the following few steps. We’ll help you with this process as much or as little as you need:

  1. Fund your investment. Instruct a big bank account manager to liquidate a fraction of your TFSA holdings to the cash amount you need to make your new investment.
  2. Open a self-directed TFSA. Ask your financial institution (any Canadian chartered bank or trust company) to do this. If you are purchasing a private investment fund or shares of a mortgage investment company, those issuers will have registered account “service providers” who will help you open your new TFSA self-directed investing account.
  3. Transfer your liquidated funds to your new account. You’ll complete a “transfer instruction” whereby your new financial institution will request that your current big bank TFSA institution to transfer the liquidated funds to your new self-directed TFSA account.
  4. Wait for the funds to transfer. The transfer can take up to four weeks. In order to maintain TFSA eligibility, funds must move directly from one TFSA account to another. You cannot withdraw the funds yourself, take them to your financial institution, and deposit them. DO NOT WITHDRAW YOUR MONEY. TRANSFER ONLY.
  5. Invest your TFSA into private real estate. Once the funds arrive in your self-directed TFSA account, as above, you will issue a payment instruction to tell the self-directed TFSA account to fund your investment in the private mortgage investment entity. The financial institution has a standard form of payment direction that it will provide to you.
    The investment income that accumulates in your TFSA may be withdrawn by you tax free!

Investing your TFSA in private mortgages is easy! Nevertheless, it’s important to have your advisor orchestrate the process on your behalf, as there are moving pieces

Summing Up How to Invest with a TFSA

Your registered investment account savings are your nest egg. Be careful with how you employ and invest these funds. Not everyone knows how to invest TFSA funds. Work closely with reputable dealers to first determine whether investing in private mortgage securities is suitable for you and, if so, what the best private mortgage investment products are for you at the time you want to make the investment.

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Mortgage Investment Guide for Beginners and the Role of the Advisor

You’re trying to grow your nest egg, but you have limited capital and can’t risk losing too much. You want to do more with your money, but you don’t know where to start or who to ask for help. All the while, your savings account is earning next to nothing. Yep: You’re in an investing rut. And we can help get you out of it. It’s time to learn about passive real estate investing.

How can I passively invest in real estate? testing

There are many different ways to invest in real estate, both actively and passively. Passive real estate investing might sound intimidating, but it’s not as complicated as you might think. And no, you won’t have to perform any landlord duties. Passive real estate investing is an avenue many modern and savvy investors are choosing to explore. Passive real estate investing includes:

  • REITs
  • Unit Trusts
  • Mortgage Investment Corporations
  • Mortgages
  • Syndicate Mortgages
  • Buying income producing properties
  • If you’d like to learn more about each of these options, click here to read more.

Today, we’re focusing specifically on mortgage investing. Paired with traditional investments like stocks and bonds, mortgage investing provides stable returns and lower fees while mitigating investment risk. Careful real estate investment will give back substantially more than a savings account or a GIC and will often outperform popular mutual funds and exchange traded funds. Most importantly, it enhances diversification to a portfolio of publicly traded securities. It’s recommended that every investor, big or small, put some portion of their investment portfolio in private real estate.

Mortgage investing is a great way to passively grow your nest egg. It doesn’t require substantial upfront investment, but you’ll still earn stable monthly income and higher returns.


Don’t have enough upfront capital to make a downpayment on a house? Priced out of the housing market altogether? Worried you’re not saving enough for retirement? There’s still plenty of time to invest and save.

In this article, Fundscraper provides an investing playbook to show you how to invest as little as $5,000 in mortgages without the hurdles, obstacles, and barriers of traditional investing. Consider this your primer on mortgage investing. We want to empower you to get out of your investing rut and start growing your wealth. Here’s how to start building your real estate portfolio with a low upfront capital investment.

What is mortgage investing?

Mortgage investing isn’t buying a building or a piece of land. It’s buying (or investing) in what the building owner needs in order to buy a property: the mortgage! A mortgage is a loan that is backed up by the property the owner has purchased. If the borrower fails to pay you back, you can take the property and sell it to pay yourself back. A mortgage can be fractionalized, divided up, and everyone can take different pieces.

There are thousands of income products in our financial markets today. The oldest among the lot is mortgages and they remain today one of the top income products for institutions of all kinds and individuals seeking income. Therefore, a big concern for mortgage investors is whether or not the mortgagor (aka the borrower) can regularly meet its obligation to pay the interest the mortgage investment promises.

It’s time to start thinking differently about real estate investment.

How does mortgage investing work?

When you become a mortgagee—aka a person who lends money where the repayment obligation is secured by the property the borrowed money is being used to purchase—you lend your money out with the expectation that the money will be returned to you. To “secure” the repayment, the borrower gives the lender an interest in their property that will allow the lender to take ownership of the property if the borrower fails to repay the loan.

While the money is outstanding, the borrower will pay you a fee for the use of your money—in other words, interest. How much interest is paid by the borrower is decided between you and the borrower. The rate of interest is set on a yearly basis and the most common way it is paid is monthly.

There are three popular ways of investing in mortgages: public mortgage funds, private mortgage funds, and mortgage syndication.

  1. Public mortgage funds: You can invest in a publicly traded fund (meaning it trades on a public exchange and you can buy and sell whenever you please) that is made up of mortgages. Each are easy to access through your investment broker or through a direct investment account that is likely available through your bank. Yet the drawback of these investment vehicles is that they are publicly traded. If you don’t already have at least 20% of your current portfolio in the private real estate market, we recommend further diversifying your investment portfolio first via one of the two options below.
  2. Private mortgage funds: A private fund does not publicly trade, and once you invest your money, you might not be able to get it back right away. The returns on a private fund can often be significantly better than a public fund, generally the result of a unique skillset the asset manager brings to the mortgage fund. A licensed mortgage broker or securities dealer like Fundscraper can advise you as to which funds are most suitable for you.
  3. Mortgage syndication A mortgage syndicate is where you and one or more persons fund a mortgage directly. Investing in a mortgage syndicate is strictly for people who are experienced mortgage investors, as the investment return can be inordinately good or ruinous. When you invest in a mortgage syndicate, you acquire a direct fractional interest in the mortgage—you go on title! Mortgage syndicates are generally private, and good mortgage syndicators will only admit investors they know are sophisticated and are able to withstand the loss if the investment fails. To become part of a syndicate, one generally has to go through a qualified mortgage broker or securities dealer like Fundscraper.

 

 

3 Important considerations for first-time mortgage investors

  1. What are the risks?
  • No guaranteed high return. In general, the higher the rate of return, the higher the risk of the investment.
  • A lineup for repayment. If something goes wrong with the project, ask whether the syndicated mortgage is a first, second or subsequent mortgage. If the project fails, the first mortgage would receive any proceeds from the liquidation first. Second and subsequent mortgages only receive payments if and when the first mortgage has been fully paid off.
  • ‘Secured’ does NOT mean guaranteed. It is true that your investment will be used to create a mortgage that is registered and secured directly with the land or building associated with that mortgage. But, if something goes wrong with the project you may rank behind other lenders and investors and may not get your money back.
  • No investor protection fund. Syndicated mortgage investments are not backed by the Government of Ontario or any other investor protection fund; there is no way to guarantee you will get your money back.
  • Lack of liquidity. If you want to withdraw your money before the end of the term, there is no assurance that there will be a market for the resale or transfer of the mortgage.
  • Ask about the property value. Your security is only as good as the value of the property. Ask to see the appraisal the brokerage used to determine the value.
  1. How long will my capital be locked up?

  • Before you invest in a mortgage, you should consider how long your capital will be locked up in the investment. If you think you will need your money in the next 12 months, this probably isn’t the right investment for you right now. If you have money that you simply want to sock away and forget about, then mortgages are something you should definitely look at.
  • Mortgages have a term and investors who invest directly in a mortgage are expected to hang out of the entirety of the term of the mortgage. The term of a mortgage can be as short as six months or as long as the parties may agree. 12 months to 3 years tends to be the most common terms for mortgages in the private markets. 5 years is the most common term for a residential home mortgage offered by the banks.
  1. Will I get my money back?

  • When you lend money to someone, you do it on the expectation that the borrower will pay you back. If there is little likelihood that you will be paid back, then you probably would not lend. If you’re lending, you want to be aware of the borrower’s circumstance, which will give you some idea as to the likelihood of being repaid. If the borrower has a stable job, is known to pay debts when due, and repayment appears to be well within the borrower’s means, you have a good chance of being repaid.
  • A mortgage secures repayment. As a mortgagee, if the borrower fails to pay you, you’re within your rights to sell the property and earn a profit on the proceeds. However, a mortgagee can only take what they’re owed under the mortgage, plus any expenses enforcing the mortgage. If there’s any surplus, it must be returned to the borrower.
  • If you sell the property at a loss, in Ontario, the borrower will remain liable for the amount outstanding and owed to you. In some jurisdictions, especially in the United States, once the lender has taken over the property, the lender will have no claim against the borrower. It’s called a quitclaim, meaning the lender relinquishes its claim against the borrower.

Investing in mortgages wasn’t always simple. At Fundscaper, it is.

How do I get started?

  • Find a registered investment advisor. For a neophyte, investing in mortgages is complicated. Unless you have years of experience, you cannot do this alone. Registered advisors like Fundscraper make this complicated investment easy. The buying and selling of mortgages and investing in mortgages is all regulated by a lengthy set of laws. Registered advisors like Fundscraper know the way through the maze of this book of laws, regulations, notices and policy statements.
  • Check for a license. If you are investing in a fund or a pool of mortgages or into a mortgage investment corporation or a mortgage syndicate you will want or need the services of a registered securities dealer. Only mortgage brokers and agents licensed with FSCO can engage in syndicated mortgage transactions, and only licensed mortgage brokers (not agents) can sign the required forms. Find a licensed broker, agent or brokerage by checking FSCO’s list here.
  • Get independent advice. You are strongly advised to obtain independent financial and legal advice from someone not connected to the investment, before investing in a syndicated mortgage.
  • Read and understand all associated paperwork. Your mortgage broker must complete the proper paperwork and provide it to you. The brokerage must also keep appropriate documentation on file, including records that detail discussions with you. Before you sign, ask questions and make sure you understand everything.
  • Ensure full disclosure. Mortgage brokerages must take reasonable steps to ensure that the mortgage investment they recommend is suitable based on your needs and circumstances. They must also advise you of the material risks of the investment, disclose potential conflicts of interest, and provide evidence of the borrower’s ability to meet the mortgage payments

We invite you to speak to a Fundscraper dealing representative to get more information, learn about your investing options, and decide which investment strategy is right for you. Trust us: We’re experts. You can invest in real estate, and you can do it with as little as $5,000. Let Fundscraper show you how. Book a call with one of our advisors today.

When you invest with Fundscraper, you join a community of like minded investors exploring equity investments in mortgages. Get the feel of what it’s like to be a “mortgagee” (like, be a real lender golly gee!), without having to actually buy a mortgage!”

 

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