Mortgage Investing
What is Mortgage Investing?
When you invest in mortgages, you become the bank. In other words, instead of investing in the real estate, you invest in the loan or mortgage, which is secured by the real estate.
Why would a borrower come to a private lender rather than a bank for a loan?
It is tough to get a loan from a bank. Generally, there are three reasons a borrower comes to us:
The borrower cannot prove his income to the bank
The borrower has credit, which is unacceptable to the bank
The property does not meet the bank’s standards
As a result, we, as a private lender, charge more interest and point to offset the risk.
Is Mortgage Investing Safe?
It is, if you invest with the right company. There are many mortgage companies who sell mortgage investments. There are a few who are mortgage investment companies and many who are mortgage brokers. As an investor, you need to understand the difference and thoroughly check them out before you write a check.
What is the difference between a Mortgage Broker and a Mortgage Investment Company?
A mortgage broker is a middleman who negotiates with both a willing borrower and a willing investor to fund a private mortgage with investor’s money. Accordingly, mortgages brokered by a middleman tend to have a higher risk.
A Mortgage Investment Company, on the other hand, finds a willing borrower, usually through a mortgage broker. The investment company funds the loan with its own money. After the mortgage records, the mortgage investment company then offers the mortgage to investors. Accordingly, the mortgages have a lower risk.
Then what you are saying is that I should invest with a Mortgage Investment company rather than a Mortgage Broker?
If you want relative safety and security, invest with a mortgage investment company. If you can live with a higher risk and possibly a higher return, if you can live with a possible loss of your money, then invest with a mortgage broker.
The Brownstone Mortgage Investment Strategy
At Brownstone, we make mortgages secured mainly against income producing commercial real estate.
Generally speaking, the commercial real estate will have enough rental income to cover our mortgage payment. In comparison for example, home loans have now been almost entirely taken over by banks. Consequently, the home loans that are made available to private lenders are not investment worthy, in our opinion. Further, construction loans such as acquisition & development loans, we believe, are inappropriate for most private investors. The risk is simply too high and unknown.
At Brownstone, we have a limit of $2 million. Typically, our loans are in the $150,000 to $750,000 range. There is an old saying in lending: “Big loans, big problems; little loans, little problems.” We don’t think large loans are appropriate investments for private investors. They are, however extremely profitable for the mortgage broker.