Rob

This has become a touch market!

[...] Dollar Journey – Wealth Strategy: Buying Second Mortgages Part 1. Buying a second mortgage as an investment opportunity is something I hadn’t thought about [...]

[...] FrugalTrader05:00 amAdd comment Since writing about investing in second mortgages, I've gotten a good response from readers looking for more information. QCash, the retired 37 [...]

[...] Dollar Journey wrote two posts (Part 1, Part 2) on buying second [...]

Yes, but remember we are dealing with owners not rentals. Most owners try not to do that, as they are entitled to anything left over after the sale.

Also, keep in mind that you have to be comfortable with the LTV at the time of the mortgage, but property values generally go up too.

FT has asked me to provide a guest blog about my experiences (which I will try to get to him over the weekend) and I can give more details.

As for a big market, I know many many people who try to do the second mortgage at higher rates to avoid paying the CMHC fees on the first.

Q

[...] FrugalTrader05:00 amAdd comment In part 1, we discussed the bare bone basics of buying 2nd mortgages as an investment.  Today we'll [...]

For example, if the guy does some damage to the property before he leaves, chances are that the 1st rank will be able to cover his expenses but not the 2nd rank…

Is there a big market for 2nd rank mtg in Canada?

I believe this was done to avoid having to put down 20% as the property was rather expensive (though he did get some form of downpayment).

Again, I don’t have the full details but in a case where the interest rate is high and fairly secure than this could be a good deal, espescially in my dad’s case as he’s retired and considers these payments as a form of income.

Obviously the book FT read will have advice from one perspective – buying. He uses 60-75% of the value of the mortgage as a rule for buying but some will go beyond that. If you are the seller and can capitalize on that (with a high interest rate), you could be on the more advantageous side of the deal.

In Canada, mortgagees in a power of sale situation are obligated to maximize the value of the property at the time of sale.

If the mortgagor (even in default) feels the value is too low they can appeal to the courts to get the transaction cancelled.

That is why there are never really great deals under a power of sale or foreclosure in Canada like there are in the states.

Q

If there is a foreclosure, what kind of legal fees & delay would you anticipate before you get paid?

Mike

Actually, one of the biggest risk when you are 2nd rank is that the institution ranked first will sell at a price to cover its cost only in case of default. Therefore, you might have to buy the full 1st rank in order to recuperate your money… sounds pretty scary for individual investors.

The point is that even if you are secured, your security worth not much left once legal fees, Realtor’s fee, maintenance charges and debt is paid off for the owner of the 1st rank

The other second mortgage I have is one I hold on a business partners’ home. He asked me to invest in his business and I said I wasn’t interested in doing a straight investment, but I would finance a second on his home $25,000 @ 6.5% over 25 years. That mortgage is completely open and he can pay it back at any time. Could I do better than 6.5%? Probably, but it is tax free (in my RRSP). It arrives biweekly, and I immediately invest the payment into what ever investment I am looking at and it begins compounding all over again. Also, I know if the business fails, I still have the security of the home (LTV about 90% in total right now) and since I am in second position behind the bank, I know that I am going to get paid.

Q

Chris, I also agree with this. The 80% LTV requirement is the investors “margin of safety” as Graham would put it.