Asked to do a data sheet on equity lending.
********** Just a warning about this advice. This is based on law and securities commissions in Canada and more specifically Alberta. Although there isn’t much difference between the other provinces except those Pinko Commies in Quebec.*******
So private money and equity lending is big business not just in Canada but around the world. What I am talking about is the exact same thing that led to the financial crisis and MBS meltdown that occurred a few years ago. It works on the same principle but the difference is you won’t be pedaling crap. These are low risk loans with real security.
So you have someone that wants to borrow money. They have a house with a lot of equity in it. Meaning they owe let’s say a $100,000 but the house is worth $400,000. That means they have a loan to value (LTV) of 25%. Let’s say they also want to borrow a $100,000 from you (abc financial or Bob’s Bank). So that would bring their total Loan to Value (LTV) to 50%. You would have a bank mortgage on the title in what we call first position. Meaning that if the homeowner went into default the original lender would be first to be paid out. Now the beauty of this is you have a $200,000 buffer zone. Usually these equity loans are only for a year at most, so the price of real estate would have to be cut in by 50% in a year for you to even begin to lose money. This will most likely never happen. I have no doubt real estate can drop that much, but not in a year.
Now setting the rate and fee. Whenever you do a loan there is always a fee associated with it. Every lender does it. Even the big banks, they usually work it into the payment. The higher the risk the higher the fee. So for example using the scenario above I would assign the risk on that loan based on equity alone to be low to moderate risk. So the fee I charge wouldn’t be that bad. Probably about $10,000. Again based on the risk of this loan I would probably set a descent interest rate somewhere in the neighborhood of 10% to 14%. The reason being is because you are not in first position. If there was ever a problem you are second to get your money. The law in Alberta is such that you can basically charge whatever you want for a fee but the interest rate must be under 60% per annum. This is how the cheque cashing places and money marts of the world make their real money. Also the tax code has a higher tax rate on interest received than it does for a fee. I believe the tax rate for capital gains on a interest payment is 35% where a fee received is only charged 15%. Makes sense to charge a higher fee at all times and a lower interest rate. Most of the lending risk is based on equity, but I make the borrowers fill out an application so I can verify income, job, check their credit and other assets they have. It is just to be on the safe side. But most likely the people coming for a private loan either have one of the following 3 problems:
1.They need money instantly (I have this down pat that I can issue money 24-48 after an application is signed.
2.No Job
3.Bad credit or too much debt. This is a great way for people to pay off their debt then go to the bank and get a prime loan to pay you back and then they get a better rate from the bank.
Based on previous experience and of course having mentors, never go past 75% LTV. I try to stick to under 65% myself. That way you have a good buffer of protection and of course you are more than likely to get paid back because the home owner has a lot of stake. In the above example if you loaned $200,000 and brought the LTV to 75% you still have a $100,000 buffer and the borrower is not likely to walk away from that much equity.
Now the fun part! There are a few different ways of funding these loans. You can just use your usual bank account and money floating around in there. Or you can use your RRSP’s, that way you aren’t taxed on the income until you are 65. But in my opinion the best way to do it is the Tax Free Savings Account (TFSA). Reason being is you get to keep all the income derived off of this tax free and can spend it or reinvest it.
Probably wondering how exactly do I get paid on this Yo!! ? Well with every loan done you get post dated cheques starting a month out in advance for INTEREST only payments. So on the above example of $100,000 + $10,000 fee = $110,000 loan @ 10% a year/ 12 months a year = payment equals $1320 a month. That is right, $1320 a month of just interest being paid to you. No principal is included in that. To collect the fee at the end it is simply added to the mortgage and even though you issued the borrower a $100,000 they have to pay back $110,000 which is the actual loan amount registered by your lawyer onto the Land title or deed (U.S.) So let’s say the borrowers keep the money for a year and then pays you back. Total money made on your $100,000 is $15,840(interest received) + $10,000 fee = $25,840. Basically 25% on your money for walking down to the lawyers one afternoon to bring them a cheque.
Now the even more exciting part is let’s say you don’t want to have your money loaned out that long. Well then we can do what is called securitization. Same exact thing that Wall Street was doing and what CMHC does in Canada. Basically what happens is once the loan is registered on title, you have what is called a Note. You have the right to buy Notes or Sell Notes to other individuals. Also no license is required to do any of this. There is a lot of old guys out there that can’t be bothered to do the leg work and want to just collect interest every month. Great thing about this is if you sell them the Note all the risk is on them and you get all your capital back.
Here is how it works in its basic form using the above example. You would have a $110,000 Note collecting $1320 a month in interest. What you do is find an investor willing to buy the Note off of you. Sometimes this means discounting the note which goes like this. Borrower is expected to pay you back $110,000 on a $100,000 loan, but since you are passing all the risk onto the other investor he might want you to take what is called a haircut. So instead of getting that whole $10,000 FEE you will only get $7000. Which means the second investor will give you a cheque for $107,000 instead of the expected $110,000. So he will get paid back $110,000 after one year’s time and you make a quick $7000 plus regain all capital. Beauty of doing things this way is it can be done in a matter of days after the loan is funded. I can usually do it in 6 days. So that means in 6 days I made $7000 off of a $100,000 loan. If you annualized that out over a year my return would be $364,000 of pure profit off fees. Of course this is unlikely due to that fact I am too lazy to hustle like that and fund a deal a week. But it can be done for sure, I get a million calls and emails from people.
I do all this with professionals and rely heavily on my lawyer to do all the paperwork and make sure I am protected. This is really the second best way in my opinion for safe investing. Gold/silver/guns and ammo are probably the safest. My mentor started in the 80’s with $5000 and now his mortgage pool of cash is up to $20,000,000. Don’t think you have to start with a huge bankroll. I got started with $10,000 and it has ballooned from there. In 6 years of doing this I have had to foreclose twice. It was quick and painless and I recovered all money owed to me, not mention in my contract there are massive fees if the borrower defaults so I kind of pray more of my loans would default. Although I prefer to keep my powder dry so I tend to sell my Notes off and just keep as much fee as possible. Also if you have to foreclose you have just as much power as a bank or the government. So you don’t have to be worried, this isn’t like the landlord/renter tenancy act that gives renters all the power and fuck us landlords who have taken massive risk to owning extra homes.
Feel free to ask any questions. This really is simple and I am happy to share more info with anyone as I gave just a brief description. There is a little more too it but it is basically pretty simple and easy to start up.
********** Just a warning about this advice. This is based on law and securities commissions in Canada and more specifically Alberta. Although there isn’t much difference between the other provinces except those Pinko Commies in Quebec.*******
So private money and equity lending is big business not just in Canada but around the world. What I am talking about is the exact same thing that led to the financial crisis and MBS meltdown that occurred a few years ago. It works on the same principle but the difference is you won’t be pedaling crap. These are low risk loans with real security.
So you have someone that wants to borrow money. They have a house with a lot of equity in it. Meaning they owe let’s say a $100,000 but the house is worth $400,000. That means they have a loan to value (LTV) of 25%. Let’s say they also want to borrow a $100,000 from you (abc financial or Bob’s Bank). So that would bring their total Loan to Value (LTV) to 50%. You would have a bank mortgage on the title in what we call first position. Meaning that if the homeowner went into default the original lender would be first to be paid out. Now the beauty of this is you have a $200,000 buffer zone. Usually these equity loans are only for a year at most, so the price of real estate would have to be cut in by 50% in a year for you to even begin to lose money. This will most likely never happen. I have no doubt real estate can drop that much, but not in a year.
Now setting the rate and fee. Whenever you do a loan there is always a fee associated with it. Every lender does it. Even the big banks, they usually work it into the payment. The higher the risk the higher the fee. So for example using the scenario above I would assign the risk on that loan based on equity alone to be low to moderate risk. So the fee I charge wouldn’t be that bad. Probably about $10,000. Again based on the risk of this loan I would probably set a descent interest rate somewhere in the neighborhood of 10% to 14%. The reason being is because you are not in first position. If there was ever a problem you are second to get your money. The law in Alberta is such that you can basically charge whatever you want for a fee but the interest rate must be under 60% per annum. This is how the cheque cashing places and money marts of the world make their real money. Also the tax code has a higher tax rate on interest received than it does for a fee. I believe the tax rate for capital gains on a interest payment is 35% where a fee received is only charged 15%. Makes sense to charge a higher fee at all times and a lower interest rate. Most of the lending risk is based on equity, but I make the borrowers fill out an application so I can verify income, job, check their credit and other assets they have. It is just to be on the safe side. But most likely the people coming for a private loan either have one of the following 3 problems:
1.They need money instantly (I have this down pat that I can issue money 24-48 after an application is signed.
2.No Job
3.Bad credit or too much debt. This is a great way for people to pay off their debt then go to the bank and get a prime loan to pay you back and then they get a better rate from the bank.
Based on previous experience and of course having mentors, never go past 75% LTV. I try to stick to under 65% myself. That way you have a good buffer of protection and of course you are more than likely to get paid back because the home owner has a lot of stake. In the above example if you loaned $200,000 and brought the LTV to 75% you still have a $100,000 buffer and the borrower is not likely to walk away from that much equity.
Now the fun part! There are a few different ways of funding these loans. You can just use your usual bank account and money floating around in there. Or you can use your RRSP’s, that way you aren’t taxed on the income until you are 65. But in my opinion the best way to do it is the Tax Free Savings Account (TFSA). Reason being is you get to keep all the income derived off of this tax free and can spend it or reinvest it.
Probably wondering how exactly do I get paid on this Yo!! ? Well with every loan done you get post dated cheques starting a month out in advance for INTEREST only payments. So on the above example of $100,000 + $10,000 fee = $110,000 loan @ 10% a year/ 12 months a year = payment equals $1320 a month. That is right, $1320 a month of just interest being paid to you. No principal is included in that. To collect the fee at the end it is simply added to the mortgage and even though you issued the borrower a $100,000 they have to pay back $110,000 which is the actual loan amount registered by your lawyer onto the Land title or deed (U.S.) So let’s say the borrowers keep the money for a year and then pays you back. Total money made on your $100,000 is $15,840(interest received) + $10,000 fee = $25,840. Basically 25% on your money for walking down to the lawyers one afternoon to bring them a cheque.
Now the even more exciting part is let’s say you don’t want to have your money loaned out that long. Well then we can do what is called securitization. Same exact thing that Wall Street was doing and what CMHC does in Canada. Basically what happens is once the loan is registered on title, you have what is called a Note. You have the right to buy Notes or Sell Notes to other individuals. Also no license is required to do any of this. There is a lot of old guys out there that can’t be bothered to do the leg work and want to just collect interest every month. Great thing about this is if you sell them the Note all the risk is on them and you get all your capital back.
Here is how it works in its basic form using the above example. You would have a $110,000 Note collecting $1320 a month in interest. What you do is find an investor willing to buy the Note off of you. Sometimes this means discounting the note which goes like this. Borrower is expected to pay you back $110,000 on a $100,000 loan, but since you are passing all the risk onto the other investor he might want you to take what is called a haircut. So instead of getting that whole $10,000 FEE you will only get $7000. Which means the second investor will give you a cheque for $107,000 instead of the expected $110,000. So he will get paid back $110,000 after one year’s time and you make a quick $7000 plus regain all capital. Beauty of doing things this way is it can be done in a matter of days after the loan is funded. I can usually do it in 6 days. So that means in 6 days I made $7000 off of a $100,000 loan. If you annualized that out over a year my return would be $364,000 of pure profit off fees. Of course this is unlikely due to that fact I am too lazy to hustle like that and fund a deal a week. But it can be done for sure, I get a million calls and emails from people.
I do all this with professionals and rely heavily on my lawyer to do all the paperwork and make sure I am protected. This is really the second best way in my opinion for safe investing. Gold/silver/guns and ammo are probably the safest. My mentor started in the 80’s with $5000 and now his mortgage pool of cash is up to $20,000,000. Don’t think you have to start with a huge bankroll. I got started with $10,000 and it has ballooned from there. In 6 years of doing this I have had to foreclose twice. It was quick and painless and I recovered all money owed to me, not mention in my contract there are massive fees if the borrower defaults so I kind of pray more of my loans would default. Although I prefer to keep my powder dry so I tend to sell my Notes off and just keep as much fee as possible. Also if you have to foreclose you have just as much power as a bank or the government. So you don’t have to be worried, this isn’t like the landlord/renter tenancy act that gives renters all the power and fuck us landlords who have taken massive risk to owning extra homes.
Feel free to ask any questions. This really is simple and I am happy to share more info with anyone as I gave just a brief description. There is a little more too it but it is basically pretty simple and easy to start up.
" I'M NOT A CHRONIC CUNT LICKER "
Canada, where the women wear pants and the men wear skinny jeans