What Is Mortgage Investing
Mortgage investing isnt buying a building or a piece of land. Its buying 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 can regularly meet its obligation to pay the interest the mortgage investment promises.
How Do I Know A Good Note From A Bad One
There’s a saying in this industry: If you wouldnt want to own the property that the mortgage note secures, dont buy it. While youre actually buying the paperwork relating to the loan, the property is the collateral and what secures you. Make sure the collateral is a quality asset. Due diligence on a mortgage note often includes finding out:
- the value of the property in its as-is condition
- if there are any liens or encumbrances on the property that might affect or jeopardize your position
- if there are any unpaid taxes, potential tax liens or tax deed sales
- the annual tax rate
- if all required paperwork is in possession of the current lender
- the payment history on the note and
- the borrowers credit score.
What Do Mortgage Investment Corporations Do
Most MICs invest in high-yield mortgages with a short term length. For example, Atrium’s average mortgage term is 18 months, while their average yield from first, second, and third mortgages is 8.65%.
Even though MICs often have high-yields, MICs do not necessarily chase after risky mortgages. MICs often only lend to homeowners with a sizable amount of equity in their home. For example, 91.4% of Atrium’s portfolio is held in mortgages with aloan-to-value ratio below 75%.
Usually, a private mortgagesincludes themortgage rateand the lenders fee charged. Some MICs earn these mortgage origination fees. For example, MCAN earned $555,000 origination fees in Q3 2020, which represented 1.55% of their total income.
Also Check: Bofa Home Loan Navigator
Why Become A Private Lender/private Investor
Private lending can be a fantastic way to maximize your returns and minimize your risks. But that comes with a caveat: you must know what youre doing if youre going to become a private lender. I got into private lending for that, among other reasons. Here are my reasons:
Best For Veterans: Veterans United Home Loans
Veterans United Home Loans
Why We Chose It: We chose Veterans United Home Loans as our best investment property lender for veterans because the firm specializes in VA-backed mortgages with experts who understand this loan program better than anyone else.
Offers 24/7 customer service over the phone
Has online application and pre-qualification
Employs advisors from each branch of the armed forces
Doesn’t offer home equity loans or HELOCs
Information on FHA, USDA, and conventional loans is harder to find on its website
Founded in 2002, Veterans United is a full-service lender that specializes in VA loans for qualifying veterans, active service members, and their spouses. They are one of the largest VA mortgage lenders in terms of volume in the United States.
Investors benefit from flexible qualification guidelines, lower rates, and monthly payments, no down payments, and no private mortgage insurance. Veterans United has VA loans for as little as 0% down, and they understand how to make the VA loan work for an investor and still remain within the programs guidelines.
Among the products offered are fixed and adjustable-rate mortgages, jumbo loans, refinance loans, and cash-out loans. Loan rates change dailyNovember 2021 rates ranged from 2.750% to 3.250%withAPRs between 3.049% and 3.558% depending on the loan product.
Recommended Reading: How Does 10 Year Treasury Affect Mortgage Rates
Mics Real Estate Investment Through Debt
It appears both the real estate and stock markets in Canada are at all time highs Meanwhile yields on bonds and GICs are still near record lows. Even cash is losing its appeal because energy and food prices have pushed the inflation rate to a multi-year high. Which begs the question: Where can we still find value? What should people be investing in now?
Well I think I have the answer! In May I blogged about looking into mortgage investment corporations. After some further research I bit the bullet and earlier this month I invested $10,000 in a mortgage investment corporation. This new investment generates a stable 7%+ annual return, uses real estate as collateral, thrives under inflationary pressure, is hedged against the risk of increasing interest rates, can be redeemed at any time with no penalties, and adds stability to my portfolio because a stock market correction would not affect my $10K principle balance at all.
A mortgage investment corporation lets investors pool their money together to be lent out as mortgages. It essentially allows the average investor like you and I to participate in, and profit from, the mortgage lending business. This is the best thing since canned peaches! Banks make a lot of money by collecting interest on mortgage loans right? Well retail investors can also get in on this lucrative business model. Booyah!
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Mortgage Reits Offer Higher Dividends Along With Higher Risk
mREITs can generate a significant net interest margin when there’s a wide spread between short-term interest rates and long-term interest rates . Unfortunately, the spread doesn’t usually stay wide for long, which is why mREITs tend to be very volatile. Because of that risk, mREIT’s aren’t always the best option for income-seeking investors since their high yields fluctuate wildly. However, a few interesting mREITs are worth considering as their differentiated business models help insulate them from the sector’s overall volatility.
What Is Considered A Mic
A corporation can only be defined as a mortgage investment corporation if its operations is to invest funds in property, not to manage or develop property. This means that a MIC cannot be property manager or a real estate developer. MICs must also have 20 or more shareholders. No individual shareholder can hold more than 25% of the MICs issued shares.
MICs can only invest in properties located within Canada, and at least 50% of a MIC’s portfolio must be invested in Canadian residential mortgages, cash, or insured deposits.
Investors in a MIC earn money through dividends. Some MICs issue preferred shares which act like bonds by providing a fixed dividend rate. Income earned by MICs are not subject to corporate income tax. Instead, investors of the MIC pay tax on their dividends as interest income, not as dividend income. This allows MICs to act as a flow-through entity. Since MICs are not taxed, MICs must distribute their income out to their investors as a dividend.
If a corporation breaches any of these requirements, the corporation will lose their MIC status. This will result in the corporations income being taxed, and a lower return for investors in the MIC.
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What Does It Mean To Invest In Mortgage Notes
Investing in real estate mortgage notes is a lot easier than you may think. When someone buys a property, whether it’s a personal residence or an investment property, the buyer is put on the title. They’re on the deed and are responsible for maintaining the property, having adequate insurance, and paying taxes.
The lender has a vested interest in the home but isn’t responsible for property upkeep, taxes, or insurance. They simply collect a principal and interest payment each month until the note is satisfied. If something goes wrong with the property, like the roof needing to be replaced or a plumbing issue, the owner has to take care of it — not the bank.When you buy a note and mortgage, you’re buying the debt that remains to be paid on the note, secured by the asset outlined in the mortgage. You’re not buying the property — you’re buying the debt and secured interest in the property.
Essentially, a note buyer steps into the shoes of the bank. You can now collect the remaining debt on the note and receive the monthly P& I payments. You can also take legal action to regain title in the event of default.
While many loans are bought and sold at full price, some can be bought at a discount. If the loan is nonperforming, or the note holder needs to sell the note badly enough, they may be willing to part with it for less. In my experience, you can negotiate a discount of 5% to 40% off the current market value or unpaid balance, whichever is less.
Why Invest In A Mic
Investing in a mortgage investment corporation has some benefits compared to other methods of private mortgage investing, but there are also some downsides.
Some benefits of a MIC include:
- Mortgage investments are managed for you by professionals.
- You will receive a fixed dividend at regular periods.
- A large pool of mortgages spreads out risk.
- A pool of mortgages also mean that overlapping terms will even out returns, with less funds sitting idle.
Some downsides of a MIC include:
- MICs have operating and administrative expenses. These fees are passed down to investors in the form of a smaller dividend compared to interest received. For example, MCANs administrative expenses are 22% of the interest income it earns.
- Lack of control. As an investor, you do not directly choose which properties to lend money to.
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Buying A Nonperforming Mortgage Note
Lets look at a different example. A hedge fund finds a bank with a low reserve ratio and a high proportion of non-accrual loans . The bank sells a pool of nonperforming loans to the hedge fund. The hedge fund keeps some of the notes that meet its criteria but decides to sell the notes that dont fit its investment model.
The hedge fund sends you a list of nonperforming loans for sale and you look through the list to determine which assets you want to buy.
A nonperforming note where the borrower has not made a payment in over two years piques your interest. The current unpaid balance is $128,934 with 214 payments remaining. The note is secured by a nice single-family home in Georgia that you believe is worth $140,000 as-is. The original note had a 5.5% interest rate for 360 months with a monthly payment of $794.90. Because its nonperforming, you’re able to pick this up for a steep discount — just 58% of the unpaid balance, or $74,781.
Now that you own the note, you can reach out to the homeowner and see why they stopped paying. Then you can find out if they want to keep the property and work out a plan to get them paying again if they’re interested.
There are several other scenarios where you could increase the overall yield to maturity by adjusting the terms of the loan. You might increase the interest rate, re-amortize the loan, or shorten the length of the loan to meet your desired rate of return.
Once you gain title to the property, you can:
It’s Difficult To Find Yield These Days But These Five Mortgage Reits Offer Safety And Exceptionally Strong Payouts For Income Investors
In the search for rich dividend yields, mortgage REITs are in a class all their own.
These are companies are structured as real estate investment trusts , but they own interest-bearing assets like mortgages and mortgage-backed securities rather than physical real estate.
One of the biggest reasons to own mortgage REITs is their exceptional yields, currently averaging around 8% to 9%, according to Nareit the leading global producer on REIT investment research more than four times the yield available on the S& P 500. These outsized yields are enticing, but investors should approach these stocks with caution and hold them only as one part of a larger, more diversified portfolio.
One reason for this is their sensitivity to changes in interest rates. When interest rates rise, mortgage REIT earnings generally decline. The Federal Reserve is signaling plans for multiple rate hikes in 2022 that could create headwinds for these stocks.
And increasing interest rates hurt mREITs because these businesses borrow money to fund their operations. Their borrowing costs rise with interest rates, but the interest payments they collect from mortgages remain the same, causing profit margins to compress. Some of this risk can be managed with hedging tools, but mortgage REITs can’t eliminate interest-rate risk altogether.
We searched the mortgage REIT universe for stocks whose dividends appear safe this year.
- $4.1 billion
- Dividend yield: 2.9%
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Rental Property Pros & Cons
Rental Property Pros: Whether you buy an apartment complex or duplex, the biggest advantage of rental property is the predictable income stream that it generates.
Whereas a three-month house flip venture might produce a $50,000 gross profit on a $200,000 investment, a $200,000 rental property could generate, say, $1,000 a month after expenses. At that rate, youll exceedthe quick profit amount in 50 months, and the revenues wont stop there. Theyll keep pouring in month after month, year after year.
In addition to creating profit, rental income will help you pay down the loan you obtained to finance the property. And in some cases, current and future rental income helps you qualify for more favorable loan terms.
The greatest perk of owning rental property may be the tax advantages. In addition to generating income and potential profits from capital appreciation, rental properties provide deductions that can reduce the tax on your profits.
Common deductions include money spent on mortgage interest, repairs and maintenance, insurance, property taxes, travel, lawn care, losses from casualties , as well as HOA fees and condo or co-op maintenance fees.
If net cash flow isnt positive after deducting expenses, your rental income may even be tax free!
Rental Property Cons: If youve ever spent time talking with a landlord, you know that owning rental property is not without its headaches and hassles.
But these services arent free.
Six Types Of Investment Property Loans
Getting an investment property loan is harder than getting one for an owner-occupied home, and usually more expensive.
Many lenders want to see higher credit scores, better debt-to-income ratios, and rock-solid documentation to prove youve held the same job for two years.
Additionally, most will insist on a down payment of at least 20%, and many want you to have six months of cash reserves available.
If you already have four mortgages, youll need some savvy to get a fifth. Most banks wont issue new mortgages to investors who already have four, even when the loans will be insured by a government agency.
But just because its harder to get investment property loans doesnt mean you shouldnt try. Although you might not qualify for a conventional mortgage, you might get one backed by the Federal Housing Administration or Veterans Administration . You could also opt for a hard money loan or a home equity line of credit .
Some lenders wont even care about your credit or employment history, as long as they see lots of potential profits in the investment property youre considering.
Recommended Reading: Can You Refinance A Mortgage Without A Job
Is Ryan Mortgage Right For You
At Ryan Mortgage, we understand you have many options when it comes to investing and thats why were as transparent as possible. In the past, a typical investor of Ryan Mortgage:
- Understands that capital preservation is critical to long term wealth accumulation
- Is interested in simple but effective cash flow
- Is seeking direct contact with experienced fund managers
- Wants the fund manager to have a significant stake in the fund.