Risks With Private Mortgage Investments & How To Avoid Them
It’s Mortgage Monday! Today’s topic is…
What are the potential risks for an investor?
Private mortgage investments can be risky business! Here are our top 3 key things to look out for!
If you would like an appointment with a Product Specialist call the office on 1300 652 1358.
Watch the video and/or read the transcript below.
Julia: Hi everyone. Welcome back to Mortgage Mondays. I’m Julia. This
is Daniel. Today we’re going to talk about private mortgage investments
with a specific topic in mind. And what is that topic Daniel?
Daniel: The topic is risk.
Julia: Risk, that’s a good one.
Daniel: Yeah, I got asked this in the meeting the other day. Where is
the risk for the investor?
Julia: Yeah. Okay, cool. Let’s start with number one because we have
Daniel: We do have three. It’s not meant to be the entire amount of
risk that we’re covering here, but . . .
Julia: Yeah. You just picked a couple or a few that you think are
Daniel: A few key risks that you should think about.
Julia: Okay, excellent. Well, number one is legal risks.
Daniel: Legal risk is key. You want to make sure that issues, such as
contracts review act and making sure that the loan that you do
is not for consumer purposes or coded. They’re the two major
risks. And making sure, also, that you’re getting good title
over the security that you’re lending against.
Julia: Okay. Cool.
Daniel: So there are some of the risks. There could be some more legal
risks in there, but we’ll talk about that a little bit later.
Julia: Cool. Moving on let’s do number two, which is security.
Daniel: Security is the asset that you’ve loaned the money against. Now
this is where a lot of investors fall down. They lend the money
against the property, for example. When the deal goes bad and
they go to collect out, that asset or that property is not worth
anything or anywhere near the value they thought it was worth
before they did the deal.
So you’ve got to make sure that when you lend the money, that
you’ve satisfied yourself. A lot of people rely on valuers,
which is a great guide as we’ve talked about before. But the
reality is the buck stops with you as the investor. You want to
make sure you’ve done your own research to make sure that that
property is worth what you think it’s worth.
Daniel: Or at least the value is in that ballpark. When you go to
collect out on a property, your legal fees, the interest costs,
and liquidation costs all add up. You need that buffer in the
Julia: Okay. And number three, The Black Swan.
Daniel: The Black Swan, what do I mean by this?
Julia: What do you mean?
Daniel: Well, The Black Swan is just something that we haven’t covered
or you haven’t thought about. Now when you do a deal or when you
lend some money, things come out of the woodwork that you would
never expect. There might be one in a million chance or one in
one hundred chance, so you need to make sure you cover off that
risk when you lend the money or you invest your capital.
Daniel: You want to know how the best way to do that is?
Julia: Please tell.
Daniel: It is spread. Sorry, I wasn’t sure I had my microphone on. You
want to spread your risk out, because sometimes things can
happen or go wrong that you never thought.
A good guide, which they use, which I try to get people work by,
is a 10% rule. That’s just my personal opinion. I mean it might
be wrong. I might be wrong. Some people might have a 5% rule.
And what I mean by that is don’t expose any more than 10% of
your investable capital, not your net worth as an investor, in
any one transaction or deal.
Daniel: If you’re worth $10 million, but you’re only investing with 100
grand, don’t put any more than 10 grand of your eggs in one
Julia: Okay, great.
Daniel: That’s pretty much it.
Julia: All right, cool. If you’ve got any more questions or you’d like
an appointment with Daniel, call the office on the 1300 number.
Thanks for watching.
Daniel: Thanks for watching.