“Do I need a second opinion on my mortgage investment portfolio?”
This is a simple question, and for many private mortgage investors, the answer is yes.
Mortgage investments are still a niche product in Canada and most of the sellers of these products are mortgage brokers, not investment advisors or credit experts or even lenders themselves.
To decide whether you need to get another opinion, ask yourself the following questions:
Do I have a written plan for my investments?
If you don’t have a plan, how do you know where you’re going, how you’re doing in getting there, when you’re off course, and when changes need to be made? A written investment policy statement, or IPS, outlines the asset allocation of your portfolio, identifies the benchmark by which to judge how your portfolio is doing, and includes guidelines on when the portfolio should be rebalanced. Your IPS should change over time as your goals change.
Do I know that my portfolio is tax-efficient?
Do you know how the new tax rules are going to affect the income from your mortgage investments? Most of the new client portfolios that we review are not as tax-efficient as they could be. Whenever you’re paying more in taxes than necessary, there’s less in your account for you to use now and in the future.
Do I understand the level of risk in my portfolio?
Varying risks exist in mortgage investing. How the risk was gauged when you made the investment could be very different from how the risk is gauged today as the real estate market shifts and borrower exit strategies change.
Is your portfolio over exposed to a certain property type, borrower type, geographic region? Have any of the underlying exposures in your portfolios changed significantly since you made the investment? Would it be prudent to attempt to re balance your portfolio given your current assessment of the risks inherent in your specific portfolio? AAREA provides a secondary market for mortgages that are performing and non performing. You may have options other than to wait for a mortgage discharge.
Do I know that the level of risk is appropriate for my situation?
As people get closer to retirement, their level of risk often decreases. Unfortunately, without proper advice, many individuals approaching retirement have the same level of risk in their portfolio that they had when their risk tolerance was greater. Suitability isn’t an area most licensed brokers selling mortgage investments are knowledge about. Would it be valuable for you to have a conversation with a credit expert on the suitability of your existing mortgage portfolio?
Do I understand whether the advice I am receiving is ‘fiduciary’ advice?
Mortgage Investments are regulated differently from other investments. A fiduciary has the obligation of transparency to their client and to avoid conflicts of interest. Are you getting mortgage investments from a broker who is also representing the borrower? Is the company providing you with mortgage investments also managing a Mortgage Investment Corporation (MIC)? If so, you may not be receiving fiduciary advice as the provider in these circumstances may have other factors that prevent them from being your fiduciary. AAREA only represents lenders in all transactions to eliminate conflicts of interest. There is always another licensed broker representing the borrower.
Do I understand the method to evaluate investments in my portfolio?
It is best to have a repeatable process by which mortgage investments are selected and retained. Unfortunately, many people make decisions based on past performance. How are you evaluating appraisals, credit and deal parameters? Do you have investment rules or do you rely on a gut feeling?
If you answered no to any of the above statements, you may want to consider having an expert give your portfolio a second opinion.
Many investors may want to get a second opinion. Getting another review of your portfolio can help you better understand it, identify ways to improve its performance and possibly lower the taxes you pay on it.