Since writing about investing in second mortgages, I’ve gotten a good response from readers looking for more information. QCash, the retired 37 year old millionaire, has taken some of his time and written about his experiences with buying and holding second mortgages.
After FTs excellent posts about 2nd mortgages and my comments, FT invited me to share a little about my experience with 2nd mortgages.
I was first introduced in 2000 to the concept of holding 2nd mortgages within my RRSP by a friend/mentor in the real estate field. This friend built and sold houses and as such was always looking for ways to try to help his clients get a hold of their first house.
The company I hold my RRSP second mortgages in is B2B Trust (formerly, or perhaps still, Laurentian Bank). First, let me say that I don’t enjoy dealing with them. They are NOT good for customer service. I have only had one good experience with them in eight years of dealing with them. Second, I find their fees pretty high. The problem is that as far as I know, only TD offers this option and not necessarily for third party – arms lengths transactions.
Anyways, a brief history:
I was looking to buy a house with my then fiancé (now wife) and selling my townhouse. I listed the house with my friend and had an offer that was conditional on obtaining financing. The guy was going to be about $10K short. My friend suggested I do a VTB 2nd mortgage. The rate was going to be 10%. Seemed like a pretty good deal. I would have taken the difference and put it towards my new house. But at 10%, tax free in my RRSP, was too good a deal to turn down.
I set up the account and transferred the money from my existing SD RRSP to the B2B SD RRSP and let the lawyers take care of the rest. Since that time, the original client has remained consistent, paying through direct debit so I never have to do anything but open my statement.
NOW THE DOWNSIDE
After having a good experience with the first mortgage, my friend suggested there were others to be had ranging from 8-12%. Most of these were clients of his, he did the negotiating and simply let me know how much was needed. I tried three more ranging from $10,000 to $35,000.
The downside is no liquidity during the term of the mortgage.
I had a couple people have NSF problems and it was up to me to track the payments down and resubmit to B2B and reinstall the mortgage.
As rates came down and housing prices went up, all of these have refinanced (except the original one). I now only have two SD mortgages, the original one and another I hold for a friend.
All in all, I made decent money on these mortgages. None were purchased at a discount or for lower than face value. There is an inherent risk in them, and perhaps I would have been better off with some REITs or Income Trusts.
It is better if you know the mortgagor but make sure you do your own due diligence on the property value, find out why the person needs a 2nd or 3rd mortgage. Go with your gut feeling too. I always looked at what I felt I could afford in each situation.
Sounds like second mortgages can be fairly lucrative especially if held within an RRSP. I wonder if QCash would be willing to sell his second mortgage holdings at a discount. ;)