The unprecedented effects of the COVID-19 pandemic has impacted every facet of our lives. As the economy spiralled, stock, bond and oil prices dropped to historic lows. This volatility has been made more pronounced by the uncertainty swirling around public markets and the paralyzing fear and anxiety society is experiencing as a whole. With COVID-19 far from over, an uncertain path forward, and a looming potential collapse of economies worldwide, investors have more questions than answers. While many are looking for a safe haven for their investable assets, others are not able to discern which investments are right for them given this highly unprecedented global economic climate.
This is a difficult question many investors are struggling to answer given the current market volatility. Under normal circumstances, deciding where to invest your money typically depends on a number of key factors including your investment objectives, risk tolerance, asset allocation along with the current market conditions.
This latter factor is harder to track and predict currently as concerns about corporate profits mount in the near term, causing stock markets to lose their appeal. With interest rates at all-time lows, the prospects for the bond market are equally unappealing. So what are investors to do in this state of hyper-uncertainty? A flight to safety is an instinctive course of action, but in today’s investment climate, what that means is up for much debate. If anything, it is teaching us that the time is right to look beyond traditional investments to so-called alternatives, and specifically to real estate and mortgage investments as options for diversifying your portfolio.
There are a variety of alternative investments – an asset class that falls outside the conventional categories of equity, income, and cash – available to investors. Hedge funds, venture capital, private equity funds, hard assets (like collectibles and art) and real estate comprise this rapidly expanding investment segment, with real estate often in the spotlight.
Canada has experienced a stable and strong real estate market for well over a decade. Prices have increased steadily over this timeframe, buoyed by strong demand and limited supply, particularly in key urban markets like Toronto, Vancouver and Montreal.
According to its most recent forecast, real estate company Royal LePage indicates that in spite of the pandemic, the Canadian real estate market should remain relatively flat in 2020. Current projections call for a very modest 1% increase in home prices if the current lockdown conditions are eased in the early summer and a decline of 3% if the economic shutdown remains throughout the summer.
The relative stability and growth of the real estate market over the past decade has reinforced the value of investing in real estate in general and in mortgage financing in particular. mortgage investments are not correlated with public markets, and are therefore not impacted by their ebbs and flows. Moreover, mortgages tend to offer higher yields (relative to similar investments), regular monthly payments, investments that are secured by collateral against property, with minimal to no fees (as fees are borne by the mortgage borrower), and so-called illiquidity premiums.
Illiquidity premiums are characteristic of investments that are not actively traded on public markets. They are, therefore, not priced based on the laws of supply and demand but instead based on factors related to “inefficient markets”. These inefficiencies can lead to pricing errors that astute investors can capitalize on to generate a greater rate of return. In general, mortgage investments generate higher returns and have a lower risk of capital losses.
Mortgages funded by private investors, rather than financial institutions or banks, are known as private mortgages. These are usually priced at higher interest rates compared to traditional mortgages since they are targeted at higher-risk borrowers who do not qualify for a bank mortgage.
Private mortgages represent a viable option for investors looking to diversify their portfolios and take advantage of Canada’s steady real estate market. This alternative investment option generally involves a larger commitment, which can be a limiting factor for some investors. This is typically due to the fact that private mortgages, also known as whole mortgages, require an investment amount that encompasses the entire mortgage offering, which is being requested by a given borrower. Terms can vary from 6-36 months, though most tend to be shorter terms of no more than 12 months. Those investors that are unable or uninterested in investing in whole mortgage offerings can consider an alternative option that requires a smaller initial. This investment takes advantage of pooled funds to finance mortgages through a mortgage investment corporation (MIC). For more information on MICs please visit our MIC blog.
When investing in a private mortgage, you will often work with an accredited mortgage underwriter. Their role is to review your investment objectives and investor profile to find mortgage opportunities that match your time horizon, investable assets and risk tolerance.
This matching process is a critical step for any mortgage investor as it ensures you select a mortgage opportunity that fully meets your needs. A comprehensive due diligence protocol should, therefore, be something to look for when selecting a private lender to work with.
As noted earlier, there is a low correlation between private mortgages and capital markets. This means that as stock and bond markets move in reaction to various market forces, private mortgages will not necessarily follow suit, and are more likely to move independently.
Thus, private mortgages can represent a safe haven for investors looking to find opportunities in volatile markets that can still deliver respectable returns for their investment portfolio. Investors should recognize, now more than ever, the important role alternative investments play in times like these.
But, as with all types of investments, there are no guarantees and there is truly no “risk-free” investment product on the market. Each investment solution has its own unique risk profile and investors should be aware of this and the nuances of each respective product.
With this in mind, for those investors looking to stay out of public markets, for the time being, mortgage investing offers a viable and attractive option to consider.
At CMI, we offer clients a comprehensive program when it comes to investing in private mortgages. Our thorough due diligence process, led by our highly experienced underwriting team, offers you the peace of mind that your investments are in good hands.
We take the time to get to know you and your investment objectives and complete a detailed Know Your Client (KYC) document to ensure that we present you with mortgage investment opportunities that are right for you.
We also offer all of our clients a turn-key servicing program for their private mortgage investments, which provide legal and administrative services to make sure that all transactions are completed in a quick, easy and efficient manner.
We encourage you to learn more about our private mortgages and to reach out to us with any questions you may have.