Arm`s length mortgage

[Krycera]

hello.

i have 10k on my rrsp and would like to invest on arm's length mortgage.

ive never done arm's length mortgage before and i read a book called " the rrsp secret" and it talks about

arm's length mortgage.

can someone explain to me if arm's length mortgage is safe?

thanks

 

[moparcanuck]

An arm's length mortgage is one where the person you're giving the mortgage to is not related to you (ie, not you, your spouse, parents, kids, grandparents/kids, or a corp you own a signficant part of). They're safe in that you are typically on title so if the payments stop, you can foreclose and have a better chance of getting your money back. That said, if you're a second/third mortgage, the risk goes higher of there not being enough value in the property to pay everyone back, and you're second/third in line.



Additionally, I'm not sure that 10K is really enough for these types of situations. There are legal fees involved typically, and your RRSP provider will usually charge a decent fee to administer the mortgage on your behalf.



I have not actually ever done a RRSP mortgage, largely due to the part where I didn't think I had enough to work it properly. I know there are companies out there that offer to allow you to use your RRSP in small chunks (often 10-25K) and own property outside the RRSP while loaning the money inside. I worry about these as I'm not sure that General Anti Avoidance Rules wouldn't kick in, but I'm not sure that's what you're even looking at.

 

[aspcanada]

Hi Krycera,



Have you read my article on Arms Length Mortgages? It explains a lot of the pros and cons of these type of investments...



As moparcanuck mentioned, the minimum investment you'll want to invest with is around $20-25K. At TD Waterhouse, they will waive the $100/yr admin fee that they charge on self-directed accounts, if you maintain a minimum of 25K in the account. The cost of administrating an arm's length mortgage is around $100-150/yr with setup fees of around $250. And that's not even including the legal fees (~$1000). It wouldn't be worth it to an investor to only take on a $10,000 RRSP mortgage.



I'm currently putting together a $20,000 2nd and it's about the lowest I'll go...



You can read more articles on these type of investments on my blog at: www.aspcanada.com/blog



Cheers,

-Alain





Alain St. Pierre

President & Founder

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

ASP Canada Investment Corp.

1311 Mill St. North Vancouver, BC V7K 1V5

e: [email protected]

w: www.aspcanada.com
t: (778) 968-4ASP

 

[Krycera]

thanks for your reply

ill check out your blog for sure

thanks alot

 

[johnsu]

First off, good on you that you checked out Greg's RRSP secrets! That was an awesome series that I got sooo much value and knowledge from. I'm actually quite surprised that after listening to all the cd's, you're still unclear on if a 2nd mortgage is "safe"



But no worries ;-) anyways about "safe" this really is directly dependent on the LTV (loan to value ratio). The lower the loan to value, the "safer" your investment. Know this is a general statement and my personal opinion and should not be taken as an absolute answer.



2nd issue I see with yourself doing a 2nd mortgage is the amount of RRSP you want to invest. Usually 10k 2nd mortgage wouldn't be enough money for an investor to tie up a property and if he's willing to do for so little, you really want to question his motives for needing the money.



Hope that helps and if it doesn't msg me and I'd be happy to answer any questions for you.

 

[BT257954]

I've also finished reading Greg's RRSP Secrets and want to get started right away.



I currently have about $50k in registered accounts ($35k in RRSP, $15 in TFSA) and have opened my self-directed RRSP account with TD Waterhouse.



The only question I have about the process is how to find those who are interested in borrowing from me via an arms-length private mortgage? I've looked through some classifieds in the Toronto area as well as online classifieds like kijiji.com and do not see any individual RRSP investors advertising (just private mortgage companies).



Is it difficult to find someone who is interested in taking a private 2nd mortgage from an RRSP holder like myself? Would the REIN Forum be a good place to do this? Are there any other mediums (websites, forums, etc.) that currently exist where potential investors and borrowers can get together?



Thanks for your help!

 

[wgraham]

For those currently looking to place an Arms Length Mortgage, I a currently seeking investors for a couple of projects in Calgary. Please message me for details.



Greg's book is top notch. For those interested in this investment style....this is a must read!



Good luck everyone!

 

[Thomas Beyer]

Mortgages are just one way to invest in real estate through an RRSP.



Ensure interest rate is in line with the REAL risk of losing money as you are in 2nd position usually and not many real estate projects can carry 1st and 2nd mortgages, especially those with high interest rates, comfortably.



Consider the capped upside of your mortgage investment with the potential that all can be lost in a bad project !



Also consider private real estate syndications that are RRSP eligible, REITs, stocks that invest in real estate or MICs.

 

[BT257954]

Thank you for your advice Wade and Thomas, I appreciate it.



I've become more and more interested in investing in Real Estate and currently do hold other real estate related investments in the forms of REITs, etc. I'm still in my 20's and believe that arms-length mortgages is something that could really difference come retirement time (as long as I'm careful and conduct my due diligence). I've also been taking post secondary courses through UBC to better understand the valuation side of real property.



Another question I have is how to best make use of approx. $100,000 profit I earned through the sale of my principal residence. I'm currently renting an apartment and am living comfortably with a high income, low expenses, and a very good credit rating.



I was planning on buying a new principal residence, with the $100k down, by means of a home owners equity line of credit mortgage so I can eventually make use of the equity in my home to invest in real estate while also benefiting from the tax deductions related to the interest paid against my HELOC. Am I on the right track here? Or are they other opportunities/strategies I should be considering?



Thanks again!

 

[gually65]

You can do a mortgage with 10k. I've done it a few times. As for costs, you should be passing these onto the Borrower anyway. The safety lies in the ltv. My personal rule of thumb is is to not go beyond 85%. But I have to have a few other elements in place to proceed with that.
You can find all kinds of opportunities to fund by just calling around in the mortgage broker community and let them know you have private money to lend.

 

[bizaro86]

[quote user=gually65]You can do a mortgage with 10k. I've done it a few times. As for costs, you should be passing these onto the Borrower anyway.



I think the point the previous poster was making was that the borrower might not want to pay a bunch of costs (legal, etc) to borrow only 10k from you. If the borrower pays 10% on the money, plus 800 in fees, now that's an 18% effective cost of the money in the first year. It might be better (and would certainly be easier for the borrower) to take an amount that small from a credit card cash advance!



Small amounts give a borrower less incentive to work with an investor, since the work (and costs!) are about the same, but those costs are spread over less available capital.



Regards,



Michael

 

[JoeRagona]

This is a great forum to note that you have available RRSP funds as many of the members are very familiar with this type of investing. Now that you know the 'secrets' from Greg, you are in a very good position to ensure you are secured with your funds and someone is doing the right thing on their side.



The limiting factor for many people wanting secondary funds from RRSP is the available equity with both mortgages in place. If it was me, I would only lend up to 75% LTV and this is how I ACCEPT funds as well. So, be patient and wait for someone with enough equity to pull from and offer you a good return on your money.



At the same time, money is very cheap these days so high RSP seconds are challenging to negotiate in my opinion.

 

[bizaro86]

[quote user=JoeRagona]up to 75% LTV and this is how I ACCEPT funds as well.



As the borrower, what would motivate you to take an RRSP at 75% LTV instead of doing a conventional refinance of your first mortgage up to 75%/80% LTV? Wouldn't you typically get a better rate on a conventional mortgage from a bank then you would from an RRSP second?



Regards,



Michael

 

[gually65]

If you're only willing to do 75% LTV. Your money is going to be sitting idle for a long time. If you can get it out that way. All the power to ya.

From time to time I do but those opportunities are very rare.

Walter

Rrspmortgageinvestor.com

 

[Thomas Beyer]

[quote user=Krycera]i have 10k on my rrsp and would like to invest on arm's length mortgage.

ive never done arm's length mortgage before and i read a book called " the rrsp secret" and it talks about

arm's length mortgage.

can someone explain to me if arm's length mortgage is safe?




This is too low an amount as the trustee takes $200 or so a year (i.e. 2% of your investment).



A mortgage is a "safe" as the property, its operator and the loan-to-value (LTV). It can be very safe or it can be very risky !!



With 10K consider a public REIT, MIC or stock based on real estate.



For 20 or 30K or more consider private syndications or private mortgages, too .. but not with 10K due to fees of the RRSP trustee !

 

[JoeRagona]

The bank will allow a second mortgage in place up to 90% - however this is risky for the investor so to protect them, I suggest the LTV WITH their second in place is 75-80%. The benefit is taking this money out and having a balloon payment at the end which increases my cash flow for a 2 or 3 year run. Typically, most investors would not want to pull their funds from the investment and all you owe at the end of the run is the interest payment.



Sure, with money very low these days, a conventional refinance is a great alternative , which is what I mentioned in the first post - trying to get a high interest rate for your RSP funds is challenging these days in my opinion.

 

[JoeRagona]

What does your LTV look like? How are you protecting the investor if you go more than 80%? True, the equity must be there and it takes a while to build that to use which is why I don't have RRSP seconds placed yet. I do however have many investors begging to use their RSPs on top of the regular JVs.



Don't discount the fact that the RSP can also be used as a FIRST mortgage and the joint venture partners I profile have that available instead of chunking smaller amounts together costing astronomical fees.



I hope I explained that correctly.

 

[gually65]

My LTV is typically 80 to 85%. I protect myself by following a few rules of thumb. 1. For an LTV this high I normally don't go in behind a typical chartered bank. I usually like going behind Home Trust because if the 1st goes into arrears, they're very quick to give me the heads up. This gives me the opportunity to make good on it and put a fire under the borrowers butt. Chartered banks won't give you this courtesy until it's too late. I only lend on "bread & butter" homes. So in other words, properties that are easy to sell in the event of trouble. they also have o be at least a 6 out of 10 in showability. I also don't allow the borrower to go beyond a 50% TDS. If I'm still uneasy I either PPSA another chattel of the borrower or I blanket the convenient on either another property they own or one of their relatives. There's always ways to protect yourself.

JV 1sts are okay I guess but the yields aren't as good and they multiply the trustee costs for the borrower.

The key more than anything is if the loan goes into default, get your roller-skates on and collect the money or turn it over to a lawyer that specializes in mortgage enforcement right away.

Walter Monteiro

Rrspmortgageinvestor.com