If you put your money into a bank account, there is virtually no risk of loss, but you will earn almost no interest income from it, either
At 2% your money is actually losing value every year against the Consumer Price Index and the underlying inflation rate. Government T-bills pay a little better, perhaps 3% or 4%, but using the Rule of 72 your money will double its value ever 24 years at 3% or every 18 years at 4%.
At the other end of the risk spectrum are investments in many different investments, including commodities like coal, corn or futures in metals. Those investments, when managed by skillful experts may result in being able to double your money in a few months or a year or two at the most. However, the risk of loss is extremely high. In other words you will likely lose some or all of your principle making these types of investments.
The higher the potential rate of return, the more likely the investor has the risk of losing some or all of the invested capital. Investments in the private shares of small companies may also represent a far higher potential rate of return, while appearing to be low risk at the time of investment. In general, however, all of these types of investments represent a fairly high level of risk, with various rates of return.
The same thing is true of investments in stocks and bonds, or even mutual funds based on stocks and bonds
The last type of investment really available to most investors is debt investments of one kind or another in major companies, governments, or municipalities, where the risk of loss is lower, but the rate of returns is much lower. Mortgages are in this class of investments; however, their rate of return is substantially higher than most other equally “safe” or “less risky” investments.
- Investing your money in a number of smaller mortgages instead of one large mortgage. This is the method preferred by most small mortgage investors.
- Mutualisation of mortgage risk – by investing in a mortgage pooling arrangement or mortgage syndications may decrease risk by spreading it out over a large number of second mortgages or other lenders. It also slightly reduces your net returns because typically MICs invest in a mixture of lower risk first mortgages and some higher risk seconds. Syndicated mortgages tend to be for larger amounts and are used most often in commercial applications.
- Reliance on competent professionals all the way down the line is important. Seasoned investment professionals are more likely to successful than beginners. Ask lots of questions. If your mortgage broker balks at answering your questions at any time, be concerned, very concerned.
- Make sure that the lawyers doing the work are always available to answer your concerns and question. Lawyers preparing mortgages for you, have a duty of care to you. Don’t hesitate to ask questions of the law firm preparing the documents and registering the mortgages for you. Review your documents when you receive them from the lawyers, and make sure that what you were told you were getting is exactly what you in fact receive. If there are any doubts or questions, call me (or the law firm) for clarification, or in the event of an error, rectification.
Mortgages are held in your own name, unless otherwise specified in writing. This is important, and the priority of your mortgage should always be consistent with what you have been presented by the broker. The Investor Disclosure sheet provided by me is your statement of intention by the broker. The actual mortgage should conform entirely.