In my opinion, it takes at least 10 years of consistent lending experience before you should consider raising investor funds. Until you have been through some fluctuations with the economy and/ or real estate market, you do not know how your mortgage portfolio will truly perform over time. This experience is needed to mitigate the risk of the mortgage portfolio and will assist in determining the right lending criteria. Also key is having a great team, making sure you have enough experienced individuals to manage all areas of the mortgage lending business. That includes third party appraisers, lawyers, etc.
Accountability to investors
You are accountable to your investors. It is extremely important that you provide clear information to your investors on the mortgage products you are offering and the associated risk(s). This includes geographical lending areas, type and rank of mortgages, loan-to-value ratios, underwriting criteria, range in interest rates and fees charged to your borrowers. Be clear with the expectation of returns to your investors. Make sure you have the appropriate investors who are suitable in terms of risk tolerance and in relation to your business model.
Know the mortgage market and your business model
Today there is much more competition in the private lending industry. Competition is good; it provides more options and better mortgage products to the public. Be fully aware of the pricing you can charge your borrowers for the mortgage products you want to offer. Raising investor money can be difficult. It is essential that the funds are raised at an appropriate cost or the expected dividends to be paid to the investors must be in line to provide the MIC enough of a spread to cover all the operating costs. One of the worst things a MIC can do is alter their lending criteria to generate higher returns when under pressure to perform. Be very disciplined, do not let greed or pressure influence your lending decisions. If the MIC is not operating at a satisfactory level or sitting on more cash than it can lend out prudently, it should return the funds to the investors.
Skin in the game
It is imperative that the principal(s) of the MIC have a sufficient amount of their own capital invested. This will provide stability and will give confidence to investors when raising funds.
Understand all the compliance and regulatory requirements. You are accountable to the governing bodies and investors. If you fail to operate within the guidelines, there are severe consequences.
Private lending companies and MICs fill a gap in the Canadian market and competition is good.
However, my fear is that there may be some MICs opening that do not have the level of experience needed to run a long-term successful mortgage lending business. If investors lose money, it will negatively impact the reputation of the mortgage broker and private lending industry. We have had a 23-year upward cycle in the real estate market, with a couple of short-term bumps in the road.
Everyone is a hero in this market; however, when we have a market downturn, it will be a very scary place for some mortgage lenders.
This is a slightly amended version of an article written by Rajan Kaushal, president of Tribecca Finance. It has been shortened to make it suitable for web publishing.