Mortgages as Passive Income Investments
Over the past few years, passive income has become a frequently discussed topic for Canadians as well as investors across the world. The topic is especially intriguing for individuals who want to achieve financial freedom by letting money work for them around the clock and regardless of where they are in the world. This way, they can move away from the usual nine to five and do more of the things that they love. There are several ways to earn passive income but it is important to note that different options have varying levels of risk and amount of initial investment and time required.
Mortgage investment as a source of passive income.
Key Benefits of Mortgage Investment
Low initial investment
Low ongoing work required
Secured repayment
Premium and consistent return
Simple & understandable
Managing a Mortgage Investment
Managing a mortgage investment can be challenging for individual investors; however, many of these challenges can be mitigated or minimized by investing with an experienced mortgage fund manager.
Sourcing, assessing, and managing mortgage investment opportunities
It can be difficult for individual investors to source mortgage investment opportunities on their own due to several reasons including access to the market, expertise, size of investment, and various regulations. Should an investment opportunity present itself, many individual investors may have difficulty assessing the risk, structuring the loan terms, and managing the loan through its maturity. An experienced mortgage fund manager would have a team of mortgage originators and underwriters to:
- Conduct detailed analysis, risk assessment, and due diligence on the mortgage loan
- Determine and negotiate appropriate loan terms (e.g. interest rates, required securities, funding pre-conditions)
- Work with legal counsel to register required securities (e.g. mortgage charge)
- Administer and manage the loan should any issues arise
Diversification
Tax implications
Liquidity
Most investment for passive income do not allow investors to easily exit their investment. This is also true for individual mortgage investment as the investor will need to wait until the loan matures to get repaid. In some scenarios, the repayment can be delayed by a few weeks or months if the borrower requires more time to refinance the loan or to finish their project. Investing with a well managed mortgage fund can alleviate this challenge because:
- Mortgage funds generally invested in a portfolio of mortgages; therefore, liquidity events (i.e. loan repayments) can occur on a more regular basis. Nevertheless, not all mortgage funds are created equal as some mortgage funds may be largely comprised of illiquid assets and long-term loans. We will discuss this topic in another article.
- Mortgage funds raise money and receive new investments on a regular basis. This creates a level of liquidity to satisfy investment redemptions.
- Larger mortgage funds typically have access to a line of credit from financial institutions. This helps the mortgage fund manager to manage short-term liquidity requirements.
