7 Deadly Mistakes of Mortgage Investing
Investing in mortgages is a simple process. However, like investing in general, it is not easy. There is risk in mortgage investing just like in other investments.
You can lose money in mortgage investing.
Mortgage investors have lost money in the past and they will lose money in the future.
A lot of investors are attracted to the mortgage market. Many are not comfortable with the stock market. The bond market is too opaque and the real estate market is too time intensive.
And so they look at the private mortgage market as a way to make above market returns on their money with, in their eyes, little risk.
Their thinking is: since real estate is such a good investment, then making a loan secured for less than its whole value must be a safe deal.
Wrong.
Mortgage investing contains risk. Where there is risk, there is the potential for money loss.
After 40 years in mortgage investing, the following are my 7 deadly mistakes to avoid in mortgage investing.
This won’t guarantee that you will not lose money in mortgage investing but it will reduce your risk.
Remember, mortgage investing contains risk.
DEADLY MISTAKE #1: Being a part-time investor
Investing is a full time job, 24/7.
Whether the investment is in stocks, bonds, real estate or even simple private mortgages, it is a full time job. Any investment requires an attention to the market. This is only acquired by living in the market 24/7.
If not, you’re going to make mistakes or worse, you are going to be blindsided by changes in the market.
There is no risk free investment. Even simple mortgage investing contains risk. A lot of this risk is silent and subtle.
And when mortgage risk raises its ugly head it is often times in the bottom of a hard economic downturn when market emotions and fears are at their highest. A part-time investor is not going to be prepared to deal with this type of market.
DEADLY MISTAKE #2: Accepting Mr. Market’s view of the Real Estate Market.
Mr. Benjamin Graham in his 1949 book, The Intelligent Investor, created an allegory called Mr. Market. In sum, Mr. Market’s view of a financial market is based on his current emotions and not on fundamental analysis.
When the real estate market goes down, and Mr. Market is all doom and gloom, don’t panic. Don’t allow your emotions to cloud your thinking or influence your analysis.
And when the real estate market goes up, and Mr. Market is all happy and optimistic, don’t become euphoric. Don’t allow your emotions to cloud your thinking or influence your analysis.
One of the greatest challenges to investing is to look through the prevailing veil of fear or euphoria of the market.
Maintaining equilibrium of emotions is essential to successful investing.
DEADLY MISTAKE #3: Investing in mortgages in order to own the real estate
This is just a dumb idea.
Not only is it morally wrong, it may be legally wrong.
If you are making a mortgage loan, then do so under the guide of discipline and common sense not to mention fair play.
If you become a long time mortgage investor, I guarantee you will foreclose on real estate and wind up owning it.
So don’t be greedy and in a rush to own real estate through foreclosure. There is an old saying: Investors who are greedy wind up being eaten by the hogs.
Always, always be disciplined in your investment analysis. The same applies for a simple mortgage investment.
DEADLY MISTAKE #4: Chasing yield.
I saw a car one day with a sign on it that read: ‘Ask me how to earn 14%.’ A name of a mortgage broker and his phone number were given. As the car raced down the street, I could have sworn I saw other cars chasing after it.
Investors are vulnerable to chasing yield.
Yield should be the last factor in looking at any investment, not the first.
Most investors have worked hard for their money. Don’t lose your money by chasing after yield.
The first priority should be in preserving your money.
The last priority should be the yield on your money.
DEADLY MISTAKE #5: Investing in second mortgages
Second trust deed or mortgage investing is risky. In fact, I would not use the word investing here. For a private individual making a second mortgage, it really is gambling.
You have to remember that as a private mortgage investor, you are the lender of last resort. Consequently, you are going to look at all the deals that the institutional lenders have passed on. In this category of rejected mortgages are going to be requests for second mortgages. In hard money or private lending, the property is typically impaired, as well as the borrower, the borrower’s credit and the borrower’s position in life.
Here are a few reasons why you should not make a second mortgage:
Covering the first mortgage payment and principal balance.
Bankruptcy of the borrower.
Real estate market fluctuations.
Erosion of the property’s equity.
Deferred cost maintenance of the real property.
Suffice it to say that if a hard money borrower wants a second mortgage, consider proposing a new first mortgage. If the borrower or his mortgage broker insists on a second mortgage, walk away.
DEADLY MISTAKE #6: Investing in land mortgages
This is another dumb idea.
Don’t do it.
At best, the value of an empty parcel of land is speculative. In fact, until you have the legal permission to build something or to use the land for something, the vacant land parcel may not have any value.
A vacant land parcel may be worth nothing.
Until a land parcel has been granted building entitlements by the appropriate government body, a vacant land parcel is worth nothing.
ZERO. NADA.
And forget the appraisal report for a parcel of land. It is informational at best, dangerous at worst.
DEADLY MISTAKE #7: Picking just any mortgage investment person.
This is probably the worst mistake most mortgage investors make.
Some investors look for mortgage people they think they can control. Some investors look for mortgage people who are nice. Others look for experienced mortgage people. Others are just referred to them.