Managing your investment portfolio can be complicated at the best of times. When we encounter uncertain markets and quickly evolving economic times, investment decisions become much more complex.
When it comes to deciding between mortgage and real estate investing, whether you are a seasoned investor or one just starting out, there are many things you need to consider to determine which of these best suits your needs.
Mortgage Investing vs. Real Estate Investing
Real Estate Investing Basics
Many investors are familiar with the concept of real estate investing. This usually involves working with a real estate professional to find investment properties – both residential and commercial – you can purchase and then rent/lease to derive income and capital gains.
Real estate investors are involved in most aspects of the real estate transaction, including but not limited to finding and purchasing an investment property. Besides a real estate agent, you will also need to work with a real estate lawyer to close the purchase, a mortgage broker or a lender to provide mortgage financing, and a property management company to find renters for your property as well as deal with any other day-to-day issues and maintenance.
In the realm of investment portfolios, real estate is considered to be an ‘alternative investment’ since it doesn’t comprise one of the three traditional asset classes of stocks, bonds and cash. Alternatives have significantly grown in popularity in recent years as investors continue to seek out products that aren’t correlated with public markets and hence aren’t prone to the volatility or diminished returns these markets have become associated with.
Real Estate Investments are Hands-on
Real estate is very much a hands-on transaction for most investors. In addition to the time investment required for sourcing the right opportunity and being responsible for managing it, there are many financial obligations, beyond the initial down payment, that investors are responsible for, including regular mortgage payments, property taxes, utilities and repairs. And although investors stand to benefit all the capital gains that come with property ownership over time, they are also on the hook for any losses.
It’s clear then that real estate investing can be fairly complicated, expensive and time-consuming, particularly when you first start out or when you own multiple properties simultaneously. So why are so many people jumping on the real estate investment bandwagon?
This is easy to answer, the Canadian real estate market has proven to be an appreciating asset that has been consistently increasing in value over the past 20 years. While other investments, such as stocks, have been more volatile, with higher highs and lower lows, the real estate market has been on a steady incline. While appreciation of real estate is a function of many factors including the property’s location, since real estate is a finite resource (we can’t create any more land, at least not to any substantial degree) it often, at minimum, retains its value while also providing a tangible asset for investors.
Benefits of Mortgage Investing
To put it bluntly, mortgage investing is a simpler, more hands-off, version of purchasing an investment property. It involves working directly with a mortgage lender, who is responsible for matching your investment capital, risk profile and return goals, with the mortgage financing needs of qualified borrowers.
Mortgage investing eliminates the need to purchase a home and the requisite time, effort and costs that go along with that. By providing borrowers with the mortgage financing they need, investors can participate in the real estate market, and help their fellow countryman, without having to actually own property.
Other than the purchase itself, there are many similarities between these two modes of real estate investing. That said, one of the major benefits of mortgage investing is that the mortgage lender you work with can facilitate and take care of most if not the entire process for you.
From having dedicated legal professionals on retainer to in-house mortgage origination and servicing departments capable of taking care of all your administrative requirements, professional mortgage lending firms can offer investors a simpler solution to investing in real estate.
In many ways, mortgage investing provides the best of both worlds for investors – direct exposure to the real estate market without the costs, complexity and risks that come with property ownership.
Indeed, reducing risk is a key benefit of mortgage investing, making it an attractive opportunity relative to direct real estate ownership. With mortgage financing, investors are protected by collateral security, which is a key component of this product. If the borrower defaults on their mortgage or refuses to make their payments, the mortgage investor can ultimately sell the property to recoup their capital.
Real Estate Investing and COVID
While real estate investing has always had its challenges, these are further amplified by the pandemic. Indeed, managing real estate investments and collecting rents in the midst of a global pandemic has proven difficult for a variety of reasons.
With the world dealing with the many changes to our daily lives, along with the economic fallout from COVID-19, real estate investors have their hands full trying to manage their properties. The following highlights some of the key challenges facing real estate investors:
- The consequences of the pandemic have been far-reaching, with millions of people out of work and others forced to part-time employment while their employers struggle to get to the ‘new normal’. This lost or reduced income has hurt countless individuals and businesses, pushing many who were already in a difficult financial position into one much worse. This created an environment where many businesses and individuals struggle to pay their rent, leaving investors without their anticipated income and still on the hook for paying the mortgages on their investment properties.
- Government stimulus packages have been created to protect consumers and companies and give them the ability to ride out the pandemic until things get better. One aspect that directly impacts real estate investors is the mortgage payment deferrals and rent subsidies that have been put in place to protect consumers and small businesses in these unprecedented times. However, these stimulus funds have acted as a band-aid and once they dry up the risk of non-payment persists.
Mortgage Deferrals
This is an agreement mortgage holders can make with their lender to pause or suspend their mortgage payment(s) for a predetermined period of time. This temporary measure helps provide the necessary financial relief for borrowers if and when it’s needed, but it’s important to note this is only temporary and all deferred payments must eventually be repaid including all accrued principal and interest.
Canada Emergency Commercial Rent Assistance (CECRA)
This federal program provides lease subsidies to small businesses experiencing financial hardship due to COVID-19. This program, which currently runs from March to August inclusive, provides rent relief of at least 75% to small businesses. The support takes the form of an unsecured forgivable loan to qualified commercial property owners. This loan will amount to up to 50% of the gross rent for the property and will be forgiven on December 31, 2020, assuming all terms and conditions of the program have been met. This means the property owner will have to absorb 25% of the gross rent for each month in question, which is a direct cost to them. At the same time, the small business is also expected to pay up to 25% of their gross monthly lease amount.
Mortgage Administration Services make Mortgage Investing easy
Both of the above programs are designed to provide assistance and some financial relief with the repercussions of the pandemic. They provide solutions that often result in a win-win for all parties.
The challenge for many real estate investors however is dealing with the administrative component of these programs and other servicing requirements. Many simply don’t have the time or resources to complete the necessary applications or manage these types of tasks on a regular and ongoing basis.
That’s where mortgage investing can really pay big dividends for investors. Many of the larger private mortgage firms offer a full suite of mortgage administration services with their program, thus providing investors with a range of services and support they may need in order to take advantage of the programs noted above.
From delinquent and NSF payment services to the deferral of mortgage payments when necessary, mortgage servicing divisions within a private lender can provide investors with the simplicity and peace of mind they’ve longed for with real estate investing, often at no additional cost to them.
So if you’re debating on how best to invest in the real estate market and what products and solutions would be ideal for you and your specific needs, it’s important that you consider mortgage investing along with the more traditional route of direct ownership. Although both are very similar in the benefits they provide, there are unique nuances with each, with the level of involvement from the investor, and risk assumption being the major differences to be considered.
Contact us by filling out the form below and one of our Investment Managers would be happy to provide you with more information on investing in mortgages with CMI.
