Investment case for Canadian private mortgage funds: Exploring 9% yields

In today’s investment landscape, where traditional fixed-income yields remain modest, Canadian private mortgage funds have emerged as an attractive alternative for investors seeking higher returns while maintaining a connection to the historically stable Canadian real estate market. These funds can offer yields around 9%, as is the case with Shelter Lending’s fund, Northern Alliance Trust*. This type of fund represents a compelling investment opportunity for those looking to diversify their portfolio with real estate-backed securities.

Understanding private mortgage funds

Private mortgage funds pool investor capital to provide loans to borrowers who may not qualify for traditional bank financing. These funds typically lend at higher interest rates than conventional banks, creating the opportunity for attractive returns for investors. The loans are secured by real estate assets, providing a tangible backing for the investment.

The 9% yield advantage

The ability to generate approximately 9% yields stems from several key factors:
1. Higher interest rates: Private mortgages typically charge borrowers higher rates than traditional lenders, often ranging from 10-14%, allowing funds to pass through attractive yields to investors.
2. Direct lending model: By eliminating many of the overhead costs associated with traditional banking, these funds can operate more efficiently and maintain higher returns for investors.
3. Risk-adjusted returns: The yields reflect the additional risk of private lending while still being secured by real estate assets.

Risk mitigation strategies

Professional mortgage funds employ several strategies to protect investor capital:
- Conservative loan-to-value ratios: Typically lending at 65-75% of the property value, providing a significant equity cushion
- Geographic diversification: Spreading loans across different regions within Canada
- Portfolio diversification: Lending across various property types and loan sizes
- Professional due diligence: Thorough vetting of borrowers and properties

Advantages for investors

Beyond the attractive yield, investors benefit from:
- Quarterly income: Regular income distributions.
- Real estate backing: Tangible asset security without direct property management responsibilities
- Professional management: Experienced teams handling loan origination, due diligence and ongoing monitoring
- Portfolio diversification: Low correlation with traditional stocks and bonds
- CRA-registered investment eligibility: Invest through your RRSP, RESP, TFSA, LIRA or other registered accounts for tax-efficient growth.

Remember, there is still time to invest before the RRSP contribution deadline.

Market context and opportunity

The current Canadian real estate market presents unique opportunities for private mortgage funds. Traditional lenders have become increasingly restrictive in their lending criteria, creating a growing market for private mortgages. This environment allows funds to be selective in their lending while maintaining attractive yields.

Considerations and due diligence

Before investing, potential investors should consider:

- Fund management experience: The track record and expertise of the management team (in the case of Shelter Lending, the directors have more than 100 years combined real estate and mortgage lending experience)
- Portfolio quality: Understanding the underlying loan portfolio’s characteristics
- Risk management: The fund’s processes for handling potential defaults
- Liquidity terms: Understanding redemption policies and restrictions
- Fee structure: Comprehending management and performance fees

Investment fit

Private mortgage funds typically suit investors who:

- Seek higher yields than traditional fixed income
- Can accept moderate risk levels
- Have a medium to long-term investment horizon
- Want monthly income streams

Intriguing opportunity

Canadian private mortgage funds offering 9% yields represent an intriguing opportunity for investors seeking enhanced fixed-income returns, backed by real estate security. While these investments carry risks that demand careful consideration, they offer a compelling risk-adjusted return proposition in today’s investment environment. For investors willing to accept moderate risk and reduced liquidity compared to public markets, these funds can serve as a valuable portfolio diversification tool while generating attractive investment income.

For more information, contact [email protected] and visit its website at www.shelterlending.ca and www.natrust.ca.

*Northern Alliance Trust, under management of Shelter Lending, has returned an average over 8% since inception more than 10 years ago.

This article is written by or on behalf of the sponsoring client and does not necessarily reflect the views of Castanet.