Mortgage Investing: Income with a Margin of Safety

This image is no longer available


Mortgage investing is an ideal choice for investors seeking meaningful income backed by security with a margin of safety

Income seeking investors have been frustrated as the market environment has not been favourable to them for a while now. With interest rates low, equity and bond markets volatile, it has been difficult to find opportunities that allow them to sleep well at night.

Stock and bond markets reflect the chaos in the world today: Canada’s economy is weak and things are not getting better soon; confirmed when forecasters downgraded the country’s growth estimate for 2016. Blamed initially by falling oil prices, things are now spreading through to related industries as well. In the U.S., growth forecasts are being downgraded too, as inflation is starting to emerge and the risk of a recession is rising. Globally, things do not look much better with geopolitical risks increasing as numerous active conflicts bring increasing uncertainty.

What is an investor to do?
Perhaps it’s time to start thinking “outside” the stock and bond market box. At Foremost Capital Inc. we do that for clients. We focus on “alternative” investments with a discerning eye towards capital preservation and income, something that every investor wants but few actually achieve.

We’ve been through many market ups and downs over the years and believe investors don’t have to ride the market roller coaster. Investing solely in stocks, bonds or mutual funds just doesn’t cut it today. There is a better way and institutional, pension funds and smart investors know that “direct investment” or alternative investments such as real estate, mortgages, energy, receivables factoring and agriculture, provide an exceptional way to manage the market’s ups and downs and achieve their financial goals. Most, if not all, direct investments are even eligible for registered plans.

Not all alternatives are created equal
We work hard searching for the best and “right” investment opportunities for clients. We review many but few make it through our analysis. Just because they look good on paper doesn’t mean they are. We dig deep into the company. We go out and visit them and “kick the tires,” see for ourselves whose really “driving the bus” and how much and what grade of gas is in the tank. We ask hard questions – such as what is the structure of the investment, is it fair given the risk? What is the experience and reputation of the management team; do they have what it takes to bring the opportunity to fruition, and most importantly, do they have “skin in the game” and if so how much? Who are the competitors? What’s the industry outlook? We reject any opportunity if we wouldn’t invest along side with our clients. The “gems” we find we know are good for all of us.

Mortgages offer great opportunity
One alternative investment area we have been researching is the mortgage sector. We were surprised to learn how few investors directly invest in this sector. One reason seemed that many investors lacked the awareness, knowledge and access to seize these mortgage investment opportunities.

There are a number of reasons why we believe investors should have some mortgage exposure in their portfolios.

First, mortgage investing offers consistency because mortgages are insulated from the day-to-day stock and bond market volatility.

Second, income generated from a mortgage portfolio is predictable. That’s because the mortgages contain pre-determined contractually committed interest rates so as an investor, you know what to expect each month, no surprises.

Finally, mortgages offer security. They are secured against tangible real estate assets such as buildings or land. A good mortgage has a total loan-to-value not exceeding 75%. This means that there is always at least 25% of equity remaining in the property that serves as a margin of safety for the loan which protects not only the principal investment but also every last penny of interest contractually due under the mortgage agreement.

Mortgage trusts are an ideal structure
Simply put, a mortgage trust is a private mortgage investment vehicle where individual investors pool their money into units. If this sounds similar to a mutual fund or an exchange traded fund, your right. The main difference is that instead of stocks, bonds or other instruments, the trust holds a large pool containing a diversified basket of mortgages.

Six things to look for in a mortgage trust:

1) Loan-to-value less than 75% of the underlying mortgage security: This is a true measure of risk that investors are taking in a specific portfolio of mortgages.

2) Property types: Most defaults that impact total rate of return have been due to large commercial real estate loans or land development financing. Investing in diversified trusts with smaller average loan sizes, targeting urban residential lending ensures predictable returns.

3) “Skin in the game”: Look for trusts whose managers have a significant amount of their own capital invested. There is comfort in knowing the manager’s conscience is clear when picking loans they would feel comfortable funding with their own money (because they are). We look for opportunities which are even rarer, where not only does management have their own money invested but they have also agreed to get their money out last after all of the investors see their principal safely returned.

4) Quality of and access to a warehouse line of credit for managing liquidity: Line of credit availability is required within a portfolio to manage both mortgage funding timelines and the timing of investments and redemptions.

5) Monthly distributions/dividends: Most mortgage trusts save costs by paying distributions quarterly. Since normal living expenses occur monthly, it may make sense to select a trust that has a monthly distribution.

6) Management team’s experience in the business: Performance and capital preservation tend to favour long-standing experienced managers.


Your Next Steps

We believe education is important for all investors and that is why we’ve written Understanding Private Mortgage Investments – and why we are giving it to investors for FREE! The goal of the book is to provide greater depth of knowledge on the often misunderstood world of mortgage investing.

Understanding Private Mortgage Investments teaches you where the best mortgage investment opportunities can be found. You’ll learn:

– Five methods for increasing security of investment

– Best choice of legal entity for organizing mortgages

– Six criteria to select the best mortgage investment

To help you to get to know more about this sector and how to identify the best mortgage trust, we would like to offer you a free copy of Understanding Private Mortgage Investments. Please take the time to read this informative guide and consider adding a quality mortgage trust to your portfolio because everyone deserves a good night’s sleep.


foremostcapital-logo v2

Foremost Capital Inc.
459 – 409 Granville St.
Vancouver, BC V6C 1T2