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Choose safer investments to help build certainty in your portfolio.

Inflation is rising, and the stock market bounces up and down, leaving the world to wonder what is next.

While no one can honestly answer that question, we may agree that safer (more consistent) investments should be something we all need to consider in these uncertain times.

The Path to Recovery from Negative Returns is Long

Waiting for the market to bounce back has a cost! Obviously, the more significant the loss, the longer it takes to recoup, but how long is longer?

Well, in some situations, it can take up to 12 years!

For example, if your portfolio suffered a 10% loss in a single year, you need to earn 29% the following year or 10% for the next 12 years with no further losses to catch up to a portfolio with a consistent return of 8%.

So the moral of the story is that losses in your investment portfolio stick around for a long time, and they are tough to recover from. 

When interviewed, investors like Warren Buffet said that as much as 80% of an investment portfolio should be in safe investments that have no chance of losing money, and only 20% should be in equities or stocks.

Does that mean following Buffets’ advice that low-interest GICs and Government Bonds are in our future? Or should we pull 80% of our portfolio out of the market and move our money to a cash position? Of course not; there are investment options available to everyone that are safe, provide security, and have a reasonable rate of return (8-10%).

Mortgages are one such investment you may want to consider to provide your portfolio with stable rates of return, security and protection from market fluctuations.

When you invest in mortgages, you are essentially investing in real estate, but without the typical risk and pressure on your shoulders that a real estate investor may face. You are not a landlord – you don’t have to worry about doing midnight repairs, maintaining the property, or even vetting potential renters.

As a mortgage investor, you are in search of borrowers, people that could use your money to help their families. Once you have found the right family to help, you get a contract with a borrower; that contract has a rate of return that can’t be changed, it has a payment that is required monthly, and a specific period of time (the term) that your investment needs to be returned to you. If any of these contracted commitments are not met, you have an asset to sell (the property) to recapture your investment and interest without losses!

What’s the rate of return for a mortgage?

When you are lending out your money in the form of a mortgage, technically, it is no different than when the bank does it; however, I recommend you lend it out at a higher rate.

Typically the rate of return on a mortgage portfolio should net you out about 8% annually. You will have some loans with rates of 10-12% and a few in the 5-6% range. You can lend all your money out at higher rates, but there are excellent reasons why you should have a variety of mortgages in your portfolio.

What is the risk of default?

Of course, with any investment, there’s a risk, but with a mortgage, the risk of default is minimal. First, most homeowners will do what they can to avoid losing their homes.

If they are at risk and know they can’t afford the mortgage, they will typically do what they can to sell the home themselves and pay off the loan before being forced to foreclose.

If a borrower does default, though, you have the benefit of the home as collateral. According to the law, the lender that holds the loan (and that’s you and the other investors that fund the mortgage) will take possession of the home.

Once the lender has possession of the home, they can sell it. Once they receive the proceeds of the sale, they disburse the funds according to each investor’s investment plus any interest and penalties you are owed.

That may sound easy because, in most cases, it is. A lawyer handles the entire transaction, and the most challenging part is being patient and letting the system do what it is supposed to do. So even in times when the investment doesn’t go as planned, you can recover everything you are entitled to by just letting the process happen.

Why should I consider mortgages as a safer investment?

Since a mortgage is a contract, your investment is protected by that contract, including the rate of return.

When was the last time you had an investment with a guaranteed return rate and was fully secured against real estate?

There are many more reasons, of course, including being able to set the rate of return, but the real advantage is avoiding negative returns in your portfolio.

If you suffer a loss, who knows how long it will take to bring yourself back? 

If you’re closer to retirement, then it’s crucial that you pull back and be conservative with your investments and take precautions.

How to get started investing in mortgages?

If you are looking for more information on how to have high-yield mortgages part of your investment portfolio, reach out to me today, set an appointment, and we can see if this is right for you.

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