Education: What structures work best for non-bank mortgage deals?

How do I structure a private mortgage deal?

Private/non-bank mortgages are fast becoming the choice for Australian borrowers looking to secure money to fund infrastructure or real estate developments. They’re also growing in popularity with investors who want to access higher returns without introducing too much risk into their portfolio. So, what do you need to consider if you’re thinking of taking the plunge?

7 tips to set you on the right path

When making a private 1st mortgage investment, it’s a good idea to limit your risk exposure to just the mortgage. Try to steer clear of any other aspects of the transaction, such as operational risks or third-party relationships, as that can complicate matters and increase risk.

Here are some considerations:

  1. Active or passive participation: Are you looking to actively manage the loan, or do you want to outsource this to the company managing the loan?
  2. Security: Is the loan structured in such a way that you get direct security over the property that is backing the loan? Having direct security over the property means your investment is protected if the property must be sold for any reason.
  3. Transparency: Do you have direct line of sight into where your funds are being invested? Do you know what the underlying real estate asset is? Can you view all the legal documentation?
  4. Rights in event of a default: What rights does the loan structure give you in an event of default?
  5. Operational risk: Are you exposed to any operational risk in the company that is managing the loan? This involves the risk of loss due to inadequate or failed internal processes, people, controls, or systems.
  6. Alignment of interest: Do the interests of the people managing the loan align with yours? Do they have their own funds invested in the transaction on the same terms as your investment?
  7. Regulatory oversight: Does the company providing the loan hold the necessary regulatory licenses?

 

Shining a spotlight on the loan structure

In addition to these points, it’s also important to take a close look at the structure of the loan. For example, does the loan structure lend money to a company that then on-lends to borrowers? If so, you could be exposed to the operational risk of the lending company.

A more robust structure would be investing in a deal that has no other assets other than the property secured by the 1st mortgage. If it is set up as a separate Special Purpose Vehicle (SPV), the deal has no other liabilities other than repaying the investors in the loan. This reduces risk and eliminates complexity, which is what you should be looking for.

 

Adding private real estate debt to your portfolio

AltX was founded on the principle of making investing in real estate loans accessible, transparent and secure. We offer investors full disclosure on each underlying real estate asset and access to all legal documentation to support their investment. If you’re a wholesale investor and would like to learn how real estate debt investing could sit in your investment portfolio, visit www.altx.com.au/investments

 

Contact Us

Level 21, 10 Grafton Street
Bondi Junction, NSW, 2022

Phone: 1300 991 380
Email: marketing@altx.com.au 

 

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