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QCash on Investing in Second Mortgages
Since writing about investing in second mortgages, I've gotten a good response from readers looking for more information. QCash, the retired 37 year old millionaire, has taken some of his time and written about his experiences with buying and holding second mortgages.
After FTs excellent posts about 2nd mortgages and my comments, FT invited me to share a little about my experience with 2nd mortgages.
I was first introduced in 2000 to the concept of holding 2nd mortgages within my RRSP by a friend/mentor in the real estate field. This friend built and sold houses and as such was always looking for ways to try to help his clients get a hold of their first house.
The company I hold my RRSP second mortgages in is B2B Trust (formerly, or perhaps still, Laurentian Bank). First, let me say that I don’t enjoy dealing with them. They are NOT good for customer service. I have only had one good experience with them in eight years of dealing with them. Second, I find their fees pretty high. The problem is that as far as I know, only TD offers this option and not necessarily for third party – arms lengths transactions.
Anyways, a brief history:
I was looking to buy a house with my then fiancé (now wife) and selling my townhouse. I listed the house with my friend and had an offer that was conditional on obtaining financing. The guy was going to be about $10K short. My friend suggested I do a VTB 2nd mortgage. The rate was going to be 10%. Seemed like a pretty good deal. I would have taken the difference and put it towards my new house. But at 10%, tax free in my RRSP, was too good a deal to turn down.
I set up the account and transferred the money from my existing SD RRSP to the B2B SD RRSP and let the lawyers take care of the rest. Since that time, the original client has remained consistent, paying through direct debit so I never have to do anything but open my statement.
NOW THE DOWNSIDE
After having a good experience with the first mortgage, my friend suggested there were others to be had ranging from 8-12%. Most of these were clients of his, he did the negotiating and simply let me know how much was needed. I tried three more ranging from $10,000 to $35,000.
The downside is no liquidity during the term of the mortgage.
I had a couple people have NSF problems and it was up to me to track the payments down and resubmit to B2B and reinstall the mortgage.
As rates came down and housing prices went up, all of these have refinanced (except the original one). I now only have two SD mortgages, the original one and another I hold for a friend.
All in all, I made decent money on these mortgages. None were purchased at a discount or for lower than face value. There is an inherent risk in them, and perhaps I would have been better off with some REITs or Income Trusts.
It is better if you know the mortgagor but make sure you do your own due diligence on the property value, find out why the person needs a 2nd or 3rd mortgage. Go with your gut feeling too. I always looked at what I felt I could afford in each situation.
Sounds like second mortgages can be fairly lucrative especially if held within an RRSP. I wonder if QCash would be willing to sell his second mortgage holdings at a discount. ;)
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8 Comments, Comment or Ping
1. The Financial Blogger
Thx Qcash for sharing your experience!
I guess that you (or your friend) are negotiating the term and the interest rate?
It must be pretty hard to get more than 10% in today’s market, isn’t?
Nov 8th, 2007 @ 7:52 am
2. Q Cash
FB
10% is pretty rare these days, that’s why I only have the 2 left and yes I did negotiate a decent term and interest rate with my friend (6.75%) but that is because B2B has a minimum rate for mortgages (2nds are market plus 1%, 3rds are market plus 3% — I think, never done a third).
FT
I don’t think I would sell these for a discount (certainly not 60-70% less than they are worth :-) but that is because I don’t need this cash in the near future. As this is in an RRSP I don’t expect to use until 2030, I can actually let them play out for the full amortization if I choose to.
In the meanwhile, my cash grows and each year, I transfer the cash into my discount SD RRSP and purchase other investments so I can compound my compounding :-)
Q
Nov 8th, 2007 @ 8:22 am
3. FrugalTrader
QCash, what is your contingency plan in case your borrower defaults on their payments?
Nov 8th, 2007 @ 12:00 pm
4. ThickenMyWallet
QCash is right. B2B seems to be the only option going now a days for RSP 2nd mortgages and they have terrible customer service- big and bureaucratic.
Nov 8th, 2007 @ 7:45 pm
5. Q Cash
FT
I would have to take steps through my lawyer to initiate a power of sale.
No worries on the first one, the house value has risen significantly since I started the process (I sold for just over $100K and these units are listing for $160K right now). Also the payment is 75 per month so it is not a huge burden on the owner.
The second one is more difficult in that is a friend, but I also work with him on his business and am aware of his current financial situation which is why I felt comfortable doing the second mortgage for him.
When one of my previous mortgagors hit me with some NSF cheques, I went to talk to my lawyer about my options. He calmed me down and said it was doable. It is a long process to undertake a power of sale. But again, because these are in my RRSP, I am not relying on them for day to day income, so if I missed 4-6 months of payments while the power of sale took place, it wouldn’t impact my day to day life.
Q
Nov 8th, 2007 @ 9:28 pm
7. Katherine
You can lend mortgages up to 12% - it’s not uncommon through some lawyers who introduce you to the client.
You do your own due diligence as to the background of the person and the property. These are 1st mortgages as well. New Professional people in the country who cannot qualify yet under our banking system etc. There are many unusual situations out there, the trick is to find the person or lawyer who deals in this.
These might only last a year, until the borrower has established an history and can go to a bank to negotiate a lower and more current rate.
Nov 20th, 2007 @ 8:14 pm
8. Brent Irving
Excellent post. In Western Canada the returns on 2nd mortgages are around 12%. In a housing market like we’ve recently experienced 2nd mortgages have been extremely low risk.
Nov 22nd, 2007 @ 5:01 pm
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