Ever wanted to be the Banker for a change?

Have you sometimes wondered what it would be like to earn the kind of profits you hear the major financial institutions reporting in the news?

One way of “getting a piece of this action” is to consider being the banker yourself.  Being the banker refers to you loaning funds by way of mortgages on real estate.  This is a great way of passively investing in real estate without being the landlord!

So what can you use to loan out?  You can use the following funds to invest in real estate as a banker – you will be the lender registering a mortgage charge on the title of the property

• Cash
• Registered Retirement Savings Plans (RRSP’s) including Locked In Retirement Accounts (LIRA’s) and Registered Retirement Income Funds (RRIF’s) – known as Self Directed RRSP’s
• Tax Free Savings Accounts (TFSA’s)
• Unregistered Investments such as stocks, bonds etc.
• Unsecured Lines of Credit
• Secured Lines of Credit on existing real estate owned

You will have some responsibilities as a banker which will including understanding the risks and rewards of being the banker and providing mortgage financing on real estate.  You’ll need to find, screen and accept applications for mortgage financing, as well as ensure the property (which is the security for the mortgage) is acceptable to you.  The fun part is that you get to prepare and negotiate the terms of the mortgage, ensure the funds are available as agreed upon and administer the mortgage including repayment, renewal, annual mortgage statements etc.  You don’t have to do all this yourself, you can use the services of a real estate lawyer and trustee to advise on the legal documents and administration.

What are the disadvantages?

It is always important to know the disadvantages before you take the plunge and start loaning out your hard earned cash!  It can be complicated and difficult to decide what is a good borrower and property to help you mitigate the risks.  You will have to deal with collecting mortgage payments although typically these are done via direct deposit or post-dated cheques.  Don’t forget that you may have to deal with default of payments and possibly legal action including foreclosure proceedings. If there is an increase in interest rates over and above what you are charging you could see you lose some extra potential profit. If you suddenly need your cash back that you loaned out, you can’t because it is tied up in the real estate and you are legally bound by the terms of the mortgage.  Also worse-case scenario is default occurs followed by foreclosure that results in a loss of your principle and interest. 

Many of these disadvantages can be overcome by hiring the right real estate lawyer and mortgage broker on your Power Team.

The Advantages

There are many advantages including security… you have the real estate as security in a default situation as you are registering a mortgage charge on title when you provide the funds via a real estate lawyer.  The property can’t be sold without you being paid first!  You have the opportunity to diversify your investment portfolio – not having all your “eggs in one basket”.  If being a landlord doesn't appeal to you, then this gets you into the real estate investment market relatively safely.  You get to decide the terms – 1 year, 2 years etc., depending on when you want your money back!  You’ll receive a fixed interest rate resulting in a clear return on your money that is sometimes higher than your existing returns on mutual funds, stocks etc. 

You can use your RRSP and shelter the profits from tax until withdrawal Self Directed RRSP).  Not only do you get to decide on the interest rate, but you will often charge an up-front fee as well … you are the lender so that is your “fee for service” and an immediate return on your capital.  Often all legal fees for the lender (you) are paid for by the borrower… so no extra cost to you.  Even if the borrowers default, you have the opportunity to take over the property and any other existing mortgage payments to avoid a loss.  You may even end up owning a property that adds positively to your portfolio. 

Is it right for you?

This is a relatively simple question to answer… the advantages have got to simply out-way the disadvantages for you!

Toronto Market Watch: April 2013

GTA REALTORS® reported 9,811 sales through the TorontoMLS system in April 2013, representing a dip of 2%  in comparison to 10,021 transactions in April 2012. Both new listings during the month and active listings at the end of April were up on a year-over-year basis.

“Despite the headwinds we have experienced in the housing market this year, April sales came in quite strong in comparison to last year. As we move through the spring and into the second half of 2013, the demand for home ownership should continue to firm-up relative to last year,” said Toronto Real Estate Board President Ann Hannah.

“It has been almost a year since the federal government enacted stricter mortgage lending guidelines. It is realistic to surmise that some households, who originally put their decision to purchase on hold, are once again looking to buy,” continued Ms. Hannah.

The average selling price for April 2013 transactions was $526,335 – up by 2% in comparison to April 2012. The MLS® HPI Composite Benchmark Price was up by 2.9%.

“The condominium apartment segment in the City of Toronto was a key driver of price growth in April, with both the average selling price and the MLS HPI apartment index up on a year-over-year basis. The improved condo sales picture, with Toronto sales down by only one per cent compared to last year, suggests that interest in condo ownership may be improving," said Jason Mercer, TREB's Senior Manager of Market Analysis.