Real estate is getting expensive in Canada. Every month it seems sees an increase in prices, especially in Canada’s major urban centers. While this has a lot of impact on homebuyers that are on the market, it has a different kind of impact on real estate investors – and it’s pushing a lot of them into joint ventures. But, when entering a joint venture it’s important to know about the resources available to you, and know how to use them to best protect your investment.
Joint ventures can be a godsend to real estate investors, especially those that just entered the market and those that don’t have a huge amount of cash flow at their disposal. With a joint venture, one investor can partner up with another investor, for one deal only or for long-term business purposes, and together they can pool their money. With that money they can then buy real estate and turn over a profit, which in the end, of course they’ll share. If you’re going to enter into a joint venture with someone, you may have known them for a long time and fully trust them. But you may not. And for this reason, a second mortgage can be just what you need in order to protect your investment.
A 2nd mortgage placed on an investment property will place themselves second in line for getting paid should there be a default on the property. So if for example, you were investing in the Toronto market and with the help of your JV partner, purchased a property and then sold it to a buyer. The JV partners can then obtain a Toronto mortgage from a lender and then rent the property out; or supply the mortgage themselves for a home buyer in the form of private mortgages. The profit is then either the interest from the private mortgage loan, or the money leftover after paying the mortgage with the tenant’s rent. Either way, taking out a second mortgage on the property can help.
By taking out a second mortgage on the property, for the total amount of their investment, the lenders who are first in line on the mortgage (in the latter case, the JV partners,) need to be made aware of every single thing that happens with the property. That means that the property cannot be sold, refinanced, or have any other loans placed on it without the JV partners being fully aware of it.
Placing a second mortgage on a JV investment property is always done with all JV partners fully aware of what’s being done. However, it’s mostly done by those that aren’t active in the real estate market, that is they’re not a part of it from day-to-day, yet they still realize the potential that this type of investment holds and want to get involved. As lending requirements in Canada become stricter every day, even for investors, JV partnerships and protecting yourself with a second mortgage for those partnerships, are becoming ever more popular.
