I created a challenge for myself to create enough passive income to replace my living expenses- but there was only one problem. I run a business and didn’t have time to take on side hustles that required a time commitment on my part.
I needed a zero-time side hustle that could bring in some cheddar. Sound impossible right? I thought so too…
Until I discovered second mortgages.
What is it?
Not only do you not need any spare time but you also don’t need any cool skill or talent to tap into. All you need is some extra money.
Second mortgage lending is when you offer your cash to people looking for small loans and put a lien against their property as collateral. Since you charge interest on the loan (in the range of 9-15%), you happily collect your interest cheques monthly.
Here’s how it works.
Essentially its private lending.
You become the bank lending out your cash as loans to people.
There are people who need money but are having a hard time getting a loan from a traditional bank- perhaps they just went through a divorce and have bad credit or have a job that pays cash incentives so it doesn’t show on their income statements.
What they do have is a home, and preferably one with equity. Even more preferably is a home with much more equity than the loan they are asking for.
The loans are typically between $50,000 – $100,000…this is the amount of cash you’ll need to have.
In my case, I didn’t have that kind of cash at first…so, I started with $10,000 and paired up with someone else who had much more cash for my first deal.
We worked with a few mortgage brokers who specialize in these mortgages and have clients looking for money. We told the mortgage broker how much we had collectively to lend out and they called us when they had a client.
The broker sends over the borrowers profile (their financials, how much equity in their home, etc) and we decide if the risk level works for us.
The risk level is based on how much equity the borrower has on their home…more equity equals less risk which also means less interest you can charge.
Typical interest charges on these loans are between 9% for very low risk deals to as high as 15% for homes that are pretty much maxed out. The reason you are able to charge such high interest rates is because you are lending money to people having a tough time going through a traditional bank.
That’s why these deals return such nice profits.
This was my first deal:
The home was valued at $600,000.
The current mortgage (1st mortgage from the bank) was $300,000.
Therefore the equity was $600,000 – $300,000 = $300,000.
They were looking for a $100,000 2nd mortgage.
Because there was a huge buffer between the value of the home ($600,000) and the total debt (1st plus 2nd mortgage= $400,000) this was considered a low risk deal ($600,000 – $400,000 = $200,000 buffer).
We charged them 9% interest to loan the money for one year.
So my $10,000 made me $900. Then I got back my $10,000 at the end of the term of the loan.
2nd mortgages are typically short term mortgages…i.e. 1 year. So the good news is that your money is locked in for a short time period, which is nice if you plan to use your extra savings for something else in the future.
The bad news is that every year you have to look for new deals.
The borrower pays for all the lawyer processing fees to register the loan on the borrower’s property as collateral. As well, they pay the mortgage broker admin fees for finding them the loan money. So, there are no fees for the lender (just the money you’re lending).
There is no regular maintenance, you just cash in monthly interest cheques.
How you can do it too.
Contact mortgage brokers that you know or that friends and family can refer to you who are involved in 2nd mortgages.
When they present a deal to you look at the neighbourhood where their home is located…is it a desirable area? Are home prices in the area relatively high?
The package you are given will also show you pictures of the house both inside and outside. Is the home in good condition and well-maintained or outdated and falling apart? They will also give you the details of what a professional appraiser has valued the home at.
Review the risk level. The package will also let you know how much debt the home currently has. Compare it to the appraised value of the home. Are they maxing out the value of their home with debt or is there still wiggle room? You will have to determine your own risk levels.
If you are on board with the deal. Have your mortgage broker and lawyer connect to finish the deal. You’ll give your lawyer a cheque with the amount you are lending out.
Then when the deal closes they will give you your monthly cheques.
What’s the worst that can happen?
The absolute worst that can happen is that the borrower stops paying their mortgage and loan on the home and the property goes into foreclosure. You’ll have to discuss with your lawyer the foreclosure rules in your area to know your rights.
I’m from Toronto, Canada so if the home goes into foreclosure than I am entitled to be paid back my loan amount when it is sold. This is why in the initial stages of examining a deal its super important to look at the value of the property and compare it to the total amount of debt the property already has registered. Because in the worst case scenario of foreclosure you’ll want to make sure there’s enough equity in the property to pay you out.
So that’s my zero-time hustle which can still produce you a 9-15% return on your moolah.
Lisa Colalillo aka. Lisa in the city is a real estate expert. Selling real estate in the Toronto area, and produces the online show Lisa in the city TV which teaches ambitious entrepreneurs about money and creating wealth. You can find her at www.lisainthecity.ca
Is this a side hustle idea you would be interested in? Why or why not?