The expert became interested in the mortgage industry after arranging their first private mortgage deal in 2008. They went on to found their own real estate advisory firm in 2012. Mortgage investing can provide diversification and income that is difficult to find elsewhere given today's low interest rate environment. The main risks are borrower default and changes in property valuation or market conditions. An investor's allocation to this asset class depends on their unique goals, circumstances, and constraints. The expert believes mortgage investing will continue growing as an option for investors seeking income in retirement.

1. Interview on Mortgage Investing
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Mar 17, 2016
What is your experience in the mortgage industry (i.e. how did you
become an expert)?
In 2008, I had the opportunity to arrange an investment for a client in a
private mortgage. I was hooked from this first deal and began my real estate
career then, moving out of investment advisory. Aside from a lot of
education and licenses, I developed an expertise by seeing and transacting
thousands of loans, studying real estate cycles, and of course owe a lot to
others who came before me who were mentors and examples (or warnings).
In 2012, I founded Alpha August Real Estate Advisory (AAREA), a private
equity real estate firm; I wouldn’t be where I am without an incredible team
of advisors and industry professionals who have been invaluable along the
way.
Over the past 8 years I have had the pleasure of consulting with other
companies spanning real estate advisory, private equity and development,
which have all been valuable experiences. In my opinion, real estate and
investing is not something completely learned in a book or a course,
expertise can only come from transactional experience and being a market
participant.
What attracted you the industry?
I have always been interested in the investment space and was previously an
investment advisor. Real estate and mortgages, in particular, felt right for my
skill set and approach to investing. In 2008, we were dealing with the effects
of a changed tax environment for income trusts and a low interest rate
environment, which developed into what we thought were rock bottom
interest rates (although this is yet to be determined as some countries have
ventured into negative interest rate territory). For investors seeking income,
private debt emerged as a solution. I was also attracted to it because it is an
inefficient market, there is an opportunity to generate alpha (excess return)
by being a superior operator or manager than other market participants.

2. Interview on Mortgage Investing
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Most investors are familiar holding stocks, bonds and mutual funds in
their investment portfolios. Do you believe there is a case for adding
mortgages/real estate to this mix?
Well, since I am inherently biased in this answer I will try my best to be
objective. Each individual’s or family’s wealth plan is going to be unique to
their return requirements, objectives and constraints. There is no question
that if an investor only had exposure to stocks and bonds that adding real
estate or another alternative asset to the mix would increase diversification;
this is well understood. For some investors, when they consider their entire
asset mix, they may already be over exposed to real estate based on their
other holdings. However, mortgage investments can be used as a proxy for
fixed income. At AAREA, in our initial discovery meeting with new clients,
we discuss the client’s overall wealth plan and asset mix to determine how
we can best contribute to that. We also develop a personalized Investment
Policy Statement that addresses the clients objectives, preferences, and
constraints.
In the current environment, many investors have become capital gains
focused because with the effects of quantitative easing, and low interest
rates, it has been challenging to be an income investor in the traditional
sense. Cap rates have been compressed so much that some investors are
looking at real estate holdings as capital preservation instead of basing their
decisions on the income the asset does or does not generate. We are in very
interesting times. Mortgages provide an income stream that is difficult to
replicate in the current public equity and debt market environment.
Remember also that institutional investors have become some of the largest
investors in real estate and private debt over the past 10 years. Pension
funds, insurance companies and foundations/endowments have substantially
changed their strategic asset allocation with the majority of funds increasing
their allocation to real estate and other alternatives. The traditional mix of
60/40 is over for many investors.
Every investment carries risk, what are the risks with mortgages?
The main risks are borrower default and changes in the valuation of the asset
or the environment where the asset is located which could impact the loan to
value.

3. Interview on Mortgage Investing
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Other considerations include mortgage fraud, appraisal fraud, and interest
rate moves.
If someone was invested in a fund, I would be concerned about geographic
concentration, concentration to a borrower or a group of borrowers, the
default ratio, how the manager dealt with defaults, what the manager’s
experience was, fees, if the fund is leveraged, and what that leverage is.
If the mortgage is a syndication, who the other participating investors are
would be of interest.
If the mortgage was on a commercial building, a consideration of building
condition and rent roll among other standard due diligence measures would
be recommended. If the mortgage is for development or construction, I
would encourage investors to evaluate whether they are being rewarded for
the additional risks they are taking in comparison to the rate of return they
could achieve by investing in a residential mortgage or pool of mortgages.
Also, I would encourage the investor to do a review of the developer’s track
record and the fees associated with the investment.
AAREA provides commercial real estate consulting and due diligence
services to assist with these issues among others.
How do these risks differ from the more conventional forms of
investment risks?
Many of the risks and due diligence procedures are similar when considering
other types of funds or investments. Mortgages are typically illiquid, so this
can be a unique concern if comparing to public equities. Volatility is
smoothed in the real estate market, which can in some cases encourage less
diligent risk management, particularly when markets are rising as we have
seen over the past few years.
For some families, particularly those with multi generational wealth
planning requirements, the illiquidity of the asset class can actually be a
benefit.
How much should an investor allocate to this asset class?

4. Interview on Mortgage Investing
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This is impossible to answer without context. It would depend on the
individual or family’s unique set of goals, circumstances, planning
requirements and investment constraints.
Why do you think so few investors consider mortgage investments for
their portfolio?
Mortgage investing and private debt investing has become more of a known
asset class. I don’t think it is very rare anymore. The MIC industry has done
a very good job marketing itself and raising capital over the past several
years; some via syndication platforms others in MICs or trusts.
At AAREA, we work solely with accredited and high net worth investors
and family offices to develop and manage their mortgage portfolios and
other real estate investments with a high touch approach within a context of
wealth management and often multi-generational planning, which other
funds do not replicate.
In Canada there are a number of publicly listed mortgage funds, and many in
the US that offer public company governance standards and liquidity but
also come with the daily volatility of being a publicly traded security. Many
investors have (or have considered) exposure to traditional REITs because of
the income yield they offer.
If a mortgage investment isn’t something that all investors consider, it may
be due to lack of awareness or confusion around the asset class. For some
people it is new but it is actually a very old investment – the history of
lending and debt is literally ancient. The modern concept of a mortgage as
we know it today has been around since the 1930’s. Many people are
unaware that in Canada a mortgage is an eligible investment in registered
accounts (RRSP’s etc).
How much of this is because managers and brokers are not
recommending exposure to clients due to system issues, structure issues,
liquidity, etc.?

5. Interview on Mortgage Investing
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Many rules and regulations were put in place by securities regulators to
protect investors. If there is a lack of distribution, I would speculate it is
because not enough of the funds are doing what is necessary to be approved
for sale by a broker dealer, or it is less expensive for them to raise funds in
other ways.
From my perspective, as an owner of a real estate firm that has a foundation
in private mortgage debt, I think there is sufficient supply of capital for the
existing investment opportunity. In some markets, there is more than
sufficient capital which has led to lower rates of return as supply is greater
than demand. The requirement for private mortgage debt continues to grow
but this will be cyclical. There are a lot of funds, and operators in the space
now that are available to retail investors. The hard part for the investor now
is not access but is identifying a great manager with strong governance and
deal flow.
What should an investor do if the person managing their portfolio
hasn't told them or offered the opportunity for them to invest in this
asset class?
Like anything else in life, educate oneself first. It always surprises me how
hard individuals work to earn money and how easily they will give it to
investment managers. There is a lot of transparency in the market now,
compared to what there used to be; a savvy investor can gain a lot of
information and knowledge without cost. Talk to your wealth planner or
other advisors to determine if an allocation to mortgages is suitable.
What do you see in the future for mortgage investing? Do you see it ever
becoming so popular that becomes a part of every investor's portfolio?
That is an interesting question. A lot depends on what Canadian regulators
allow in terms of crowd funding to individual (non-accredited) investors and
advertising on the internet. We are seeing US and UK real estate crowd
funding companies grow at an exponential pace, but when you are starting at
zero, huge growth rates tend to look more impressive then they are. They
still only account for a small percentage of overall financing but I wouldn’t
be surprised if that changes in the future. I anticipate that the origination of
mortgages will change with technology and innovation in the future. There

6. Interview on Mortgage Investing
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is still a lot of friction in the process that can be removed. So access will be
different. There is the potential for a lot of change. This is a very old,
traditional industry that could be disrupted with change, innovation and
different thinking. I think different methods of ownership will evolve over
time as more and more people are priced out of markets which will create
interesting opportunities for investors.
Will this be a staple of every investor’s portfolio? The market capitalization
of the TMX is roughly $2 Trillion, the size of the residential prime (non
alternative) mortgage market in Canada is approximately $1.4 Trillion. The
size of the alternative mortgage market in Canada is anybody’s guess, we
have estimates ranging 1-3% of the total residential market, or perhaps $15
Billion to $50 Billion. Currently, I think this opportunity in the alternative
mortgage market is not large enough for it to be in everyone’s portfolio.
However the demand for income producing investments will only continue
as the baby boomers move into retirement and need to generate income from
their asset base.
Is part of your portfolio invested in mortgage backed or direct mortgage
securities?
Of course! At AAREA our first priority is capital preservation, our business
model is fully aligned with our clients; we often co-invest in mortgages and
always do in real estate opportunities.