Nelson

That is interesting to me. I knew about non-recourse in Alberta (I looked into it extensively when I was buying foreclosures in 2009-2010, as I took on a lot of debt at that time, and wanted to know my downside). I was under the impression the only exception to the non-recourse law was insured mortgages, but if you can put a personal guarantee in that would make me more interested in doing 2nd mortgage lending, especially in this real estate environment. One more question, (sorry!) do you have a third party appraiser you trust or do you form your own opinion of collateral value for real estate? Hey, no problem. It's an interesting business, and I'm happy to talk about it. I just checked the most recent mortgage we did and there's only a passing mention of a personal guarantee. Basically it says this loan is guaranteed by 'x' property and by a personal guarantee from the borrower. Not sure if that's put in there as a scare tactic to make the borrower think they're responsible or what. If it never goes to court and the borrower isn't educated on their rights, I can see how they could be convinced to come up with a shortfall even if they're not legally obligated to. I've always worked under the assumption that if there wasn't plenty of equity in the property, I wasn't interested. The personal guarantee was just more of a margin of safety. Maybe the lawyer was blowing smoke up my ass or I misunderstood. Who knows. Every now and again we'll ask our Realtor to value a property, but for the most part we just go over and eyeball it. Usually we insist on signing the forms at the borrower's kitchen table just to make sure the house is worth about what we think it is.

No debt, so ROE and ROA are the same. A reasonable amount of leverage would really goose returns, but we like keeping it small for diversification purposes (I don't want my whole portfolio in this) and so we can pick off what we think are the best deals. That's why we're focusing more on the secured stuff lately too. Fewer headaches. When we were bigger into the unsecured part of the market, we were doing between 15-20% ROE/ROA, but that's down slightly now. At a 80/20 secured vs. unsecured split, we're probably at about 12-13% today. Secured part of the portfolio averages just about 10%, while the unsecured part is a little higher than 24%. My experience is if you want to make more money, focus on the unsecured part of the business. Way more headaches (and writeoffs), but great returns.

One more thing to add: Alberta is a non-recourse province, the only one in Canada. So we add a personal guarantee to all our loans, which the lawyer says gives us the right to go after a borrower personally if they don't pay. I'm not sure if it'll hold up in court or not -- the only people we've sued have been on the unsecured side.

I have a number of HELOCs from large banks (both personal residence and rentals) that are floating rate, currently 3.2%, which seems like a reasonable rate to me. But I have a good job/credit rating, and the LTVs are at 80%. They're mostly undrawn, but I like to have access to cash if bargains come up (especially RE, where sometimes a cash quick close gets you a deal). I'm not sure how that compares to the US, but a prime credit can access tons of money in Canada, imo. Hard money would be for people who don't qualify at a bank, bad credit, etc. I'm considering it as a spread business (borrow on my Heloc at 3.2%, lend at 8-10%). I'd be curious, Nelson, how bad is the credit of your typical client? Presumably they have jobs, but do you pull credit? If so, what do you look for? Most of our clients have garbage credit. The worst FICO score I saw was in the 460 range. Guy had about four credit cards which were all in collections and a trailer loan which was three months behind. Oh, and he was about two weeks away from losing his house. But he only owed $50k against a $200k property. We wrapped up the existing mortgage and the other loans into a new loan at $80k, charged him 10%, and he paid faithfully for years. He was late a few times and cheques bounced a few other times, but whatever. That's expected. At $20 per late payment and $30 per NSF cheque, be as late as you want. (We waive late fees all the time, btw. If somebody is a few days late once out of every six months I'm not going to be a jerk. But if you annoy me, you bet your ass I'm charging that.)

No, it's not common for someone to pay 10% on a second mortgage. The rate bizaro86 pays is about average. We're definitely catering a very small part of the market. I'd say 80% of our customers have been to the bank and were rejected. The other 20% come to us because of convenience, a general distrust of banks, or because they've dealt with us before. Probably half our loans out currently are with repeat customers. Word of mouth helps too. These people pay a higher rate because their credit is garbage. We do a lot of consolidation loans, and people are usually in pretty rough shape before they ever come see us.They're usually at the point where they're getting threatening phone calls or letters. We've saved a few people from foreclosure too. A 650 FICO score is usually what you need to get a mortgage in Canada. I'd say our average borrower is in the 500-550 range. We don't mind so much because we're secured with plenty of equity. Go ahead, don't pay. We'll just take your house. Nobody wants to lose their house. There's no real estate auction market here, so we've never done anything like that. We've done stuff like flips plenty of times. But the majority is debt consolidation.

We are not a bank. We don't attract deposits or anything like that. We're just guys who lend money. There's no licence needed. We're the only lenders in town, which helps a ton. If you were competing with other private lenders my advice would be give great service to brokers. Do stuff like make quick decisions. Brokers want the path of least resistance. Like I mentioned above, a loan fee gets added onto the principal. Total fee of $3k is what we usually do, with $1k to us for lawyer's fees and $2k to the broker for doing the loan. If the loan is smaller (between $10k and $20k), the broker will usually take less. We've evolved to the point where we don't do many broker deals anymore. The one mortgage broker in town quit, lol. Tempted to get into the game, but I'm not especially bullish on real estate in general. Thanks a lot! Have you ever thought of becoming a bank, attract deposits and grow into a bigger lender? I shouldn't speak for Nelson, but the hurdles of starting a bank are pretty high in Canada, my impression is higher than the US. There are very few small banks here. Nelson, I'm curious, how do you compete against places like the cash store/money mart? It seems like that would be what people would think of first and it would be more convenient. Or is your town small enough not to have that? I've often considered going into this business (in Calgary, where I live) but have never pulled the trigger. Do you find yourself getting smaller, loans from brokers as well? I'd be interested, but for diversification/portfolio size reasons probably wouldn't want to lend more than 20k to one borrower, which wouldn't cover a mortgage refinance, obviously. Do you write second mortgages as well? There used to be a Cash Store in town. It closed up shop about two years ago. We like to think we ran it out of town, but it probably had something to do with the issues surrounding the parent company. I believe they went bankrupt and then the operations were bought by Easy Financial. We found it wasn't that hard to compete with them. They insisted on doing withdrawals from bank accounts. If they tried to take money on a certain day and it wasn't there, borrowers would get hit with NSF and late fees of something like $50. Our customers were telling us there was no option for them to pay cash. We sort of stumbled upon that advantage. To be honest we just put the word out we were looking to do loans. We got a broker on our side and it snowballed from there. We've done very little advertising. The majority of secured loans we do are second mortgages. The biggest one we have outstanding is $50k, but most are between $5k-$20k. We find that if you go much over these small loans the borrower just gets in over their head. If you're worried about diversification -- a valid concern, btw -- just tell brokers you're interested in doing smaller loans. Our split right now is about 80/20 secured to unsecured. We don't like to go nuts with the unsecured stuff, even though the rates of return are much higher. It's tougher to break into this business in a bigger city because there's more competition. There are already much bigger private lenders out there, and many of them won't venture beyond their own city's borders. You can differentiate yourself by a) ripping borrowers off less and b) giving brokers the path of least resistance. An example: many private lenders are happy to give someone a year mortgage at say 10%, all while charging a loan fee of 2%. They keep half, the broker gets half. This is standard in the business. A year later the customer has to qualify again. They're happy to do the loan again, but charge another 2% loan fee even though nothing has changed.

We are not a bank. We don't attract deposits or anything like that. We're just guys who lend money. There's no licence needed. We're the only lenders in town, which helps a ton. If you were competing with other private lenders my advice would be give great service to brokers. Do stuff like make quick decisions. Brokers want the path of least resistance. Like I mentioned above, a loan fee gets added onto the principal. Total fee of $3k is what we usually do, with $1k to us for lawyer's fees and $2k to the broker for doing the loan. If the loan is smaller (between $10k and $20k), the broker will usually take less. We've evolved to the point where we don't do many broker deals anymore. The one mortgage broker in town quit, lol. Tempted to get into the game, but I'm not especially bullish on real estate in general. Thanks a lot! Have you ever thought of becoming a bank, attract deposits and grow into a bigger lender? Bizarro86 is right, it's hard to become a bank in Canada. I think there's zero chance of that happening. Attracting capital isn't an issue so far, since we prefer to self fund. The way we see it is we're already doing risky loans, we really don't want to add another layer of risk on top of that.

We're the only ones in town, basically. At least that we know of. No idea where these guys go when we say no. Paperwork is easy. It's just standardized forms we basically copied from competitors. Storage lockers. Buddy wanted money to expand his business of buying storage lockers. That was a fun diversion from cars and consolidating debt.

We are not a bank. We don't attract deposits or anything like that. We're just guys who lend money. There's no licence needed. We're the only lenders in town, which helps a ton. If you were competing with other private lenders my advice would be give great service to brokers. Do stuff like make quick decisions. Brokers want the path of least resistance. Like I mentioned above, a loan fee gets added onto the principal. Total fee of $3k is what we usually do, with $1k to us for lawyer's fees and $2k to the broker for doing the loan. If the loan is smaller (between $10k and $20k), the broker will usually take less. We've evolved to the point where we don't do many broker deals anymore. The one mortgage broker in town quit, lol. Tempted to get into the game, but I'm not especially bullish on real estate in general.

Our market is small, no doubt about it. And when the banks were throwing out HELOCs like it was nobody's business we didn't get much. But now they've tightened up. Once you've been rejected by the bank you don't have much choice. We also have the advantage of being in a small town with limited competition in this space. Pulling title for the house is easy in Alberta. We do it as due diligence, and then the lawyer does it again when they're registering the mortgage. Most loans are standard. Guy has a job, guy borrows money, guy repays from employment earnings. We're more careful with unemployed guys, obviously. We've done stuff where an unemployed guy only has to pay a small amount back monthly until they get a job and then the payment increases. Unemployed guys are always secured with lots of equity. We probably say no immediately to 80%. Only one loan I can think of was refinanced with another lender, and he rolled up a bunch of other debt into it. The rest they pay off. Since we're usually rolling up debt, we check affordability ratios. It's usually very obvious when the ratios are too high. But at the same time, you can't be set on 40% total debt service like the banks are. That's when equity comes into play. If you're at 40% LTV and the debt ratio is a little high, you don't sweat it so much. At 70% that's probably a deal we'd say no to.

We've really only had relationships with a couple of brokers. We just called them up, told them the types of loans we were willing to do, and let them bring us business. The first one was great, sending us quite a few deals. The second one not so much. You can get started in this business with just $10 or $20k. We find our customers are really only looking for that much most of the time. They're usually looking to consolidate other bills into one payment, or they have a temporary cash flow problem. I've never had a mortgage broker or a banker ask how much capital we had. Mortgages are all done through a lawyer, we pay about $750 per transaction. Usually that gets charged back to the borrower through a $1-3k loan fee. If a broker is involved, we charge $3k and use $2k to pay them. With unsecured debt the form is just a standard promissory agreement, which has held up in court for us time and time again. We have an office, which we use for other stuff besides this. So overhead isn't bad. We also did the business for years without an office too, just going to people's houses.

$10k car loan, guy paid down until he hit $7k over the course of about 30 months. Collected enough in interest it wasn't that bad, and we successfully sued him. We just can't find him to collect on the judgement.

I brought up in another thread how I do some hard money lending and a few people asked me about it. I promised a new threat talking about it, so here goes. There are two facets to the business. I try to do the majority of my lending against physical real estate. Since I'm convinced Canada is in a bubble, my max LTV is usually 65%, although it's usually much lower. You can get between 8-12% fairly easily doing this. Sure, there are risks, but I find I really minimize them by keeping my LTV low. The other facet is unsecured lending. This is a little trickier because even if you have collateral, it's usually not even worth the principal of the loan. If the guy is buying a $10,000 car, he's pretty much upside down from day one. Rates are much higher (24-36% annually), and over time you'll have a 3-10% write-off rate. When times are good your write-offs are low. They go up as the economy falls. I got started approaching the banks and mortgage brokers to tell them I was in the business. It just snowballed from there. A good mortgage broker will give you a steady stream of customers, and customers will refer their friends. I usually like friend referrals because if guy b doesn't pay I can put pressure on guy a. If somebody gets more than 30 days behind on an unsecured payment I just sue. I do small claims court, it's easy if you have your paperwork in order. On mortgages I wait until 90 days before foreclosing. I've never had a mortgage go bad, obviously the unsecured stuff goes rotten every once in a while. I'm fortunate that my partner (my dad) is willing to go to court when the time comes. After write-offs, we've easily averaged 15% returns over the last decade. That's going down as we shift towards more private mortgages, but so is our risk. Any other questions I'd be happy to answer.

Would be interested to hear more about your business, if you don't mind sharing. Where do you find clients etc? Sure. I don't want to hijack this thread too much, so I'll start a new one.

Here's one that'll create some controversy: Warren Buffett gets too much credit for going on CNBC/FOX/wherever and saying stuff that's basically common sense for most anyone with a brain for finance and a few decades of experience. Not saying Buffett isn't worth listening to, because he's filled with timeless wisdom. But he's also said the same pieces of wisdom over and over again, and it's not unique. It's been a very long time since I've read something Buffett said and really thought it was interesting. Maybe that's because he's so widely quoted, I dunno.

This thread is especially interesting to me since I own a position in DirectCash, an ATM operator. I do some hard money lending. Most people pay me back in cash, some do post-dated cheques. A select few will to electronic transfers, but let's face it. If you're borrowing money from a guy rather than a bank, you're not very financially savvy. These people deal in cash. They barely have bank accounts. So I end up with a bit of cash each month, which I split up between me and the wife and we spend it on stuff. My credit card only gets used for online stuff and the occasional big thing. I'm that guy who is ahead of Jurgis in line fishing out nickels so I end up with paper change back from a transaction. Even though I use tons of cash, I still think much of what DTEJD1997 said in the original thread is overstated at the least and flat out wrong at the worst. A disaster might happen once a decade where you won't have access to credit/plastic, and even then you're only without it for a matter of hours to at most a couple of days. As for holding gold and silver, I'm not interested. They're just too manipulated by speculators to be natural inflation hedges. Just look at the meltdown in each after the 2011 highs. If you're scared of paper money, stuff like real estate, and oil will still have real value. There's also no way paper money is going to collapse for the whole planet. So if you're scared of the U.S. turning into the next Zimbabwe, just make sure you have investments diversified around the world. Easy. I don't think cash ever goes away. It's still pretty convenient, certain people really like having it, it's easy to transfer, etc. The use of it might slowly go down over time, but that's it. Ever since I bought Directcash shares I've been keeping an eye on ATMs wherever I go out. And the amount of people I see using them even though the store/restaurant takes all forms of plastic is unbelievable. When you're not very financially savvy, paying $2 for access to your money is apparently quite okay. We accept that people eat fast food and drink soda that's bad for them knowing full well the consequence, yet we don't accept they'll do things like withdraw money while paying $3 for the privilege or pile into mutual funds. I find that interesting.

Most investors should spend less time on the theory of value investing and more time doing fundamental analysis on real companies.

Yeah, plus collecting dividends during weak markets helps to keep your emotions in check too. A stock might be down 25%, but you're still getting paid to wait. Seeing the dividends flow in help keep me sane at least.

That's a trivial conclusion. Of course that has to be true because dividends ultimately have to be grounded in profits, so as a group of course dividend payers/growers are going to be more healthy than non-payers. The issue is if you can find other markers of good performance besides dividends that may be even better. For example share shrinkage. I think dividend champions and the like are generally way overrated. Huge portions of the market are addressed towards investing in those stocks at the exclusion of every other kind of stock. I absolutely love to identify companies that could be huge dividend payers but for some reason or another aren't. That's a very hated subset of the market and if price offsets it or if there are good reasons, I will bet on them. I'm also not a huge fan of this strategy I've seen (especially on Seeking Alpha) where the history of dividend growth seems to be the most important thing to consider. This stock isn't a dividend aristocrat? Then don't even consider it! Pure bunk. I'd say the better dividend growth strategy would be to identify companies which are relatively small and have a huge potential market ahead of them they can capture while largely self-funding themselves. As for all those dividend studies that say dividend payers outperform non-payers, I find them absolutely hilarious. Dividend paying stocks tend to be profitable. Non-payers tend to not be, or at least less profitable. Therefore, all you're saying is successful companies tend to outperform unsuccessful ones. Well, duh. The issue becomes when dividend investors hold up these studies as gospel, all but saying dividends are the key to outperformance.

What always scares me is when management decides they're going to get into some other business that's barely related. NO! THIS DOESN'T END WELL! I'd say most managers are good operators. Only a select few are good capital allocators too.

Yeah, it's fun to go back in time and see the correlation between buybacks and market tops. For the most part, management teams have awful timing when it comes to buybacks. Sure, there are plenty of exceptions, but they're not the rule. Not even close.

Just wondering how much dividends play into everyone's investment decisions. I'd consider myself dividend agnostic, not caring whether a stock paid a dividend or not. As long as the value is there, then who cares, right? Most companies have opportunities to reinvest their earnings, even if the result is overpaying for some acquisition. But at the same time, I find I really like getting dividend payments. I usually get enough each month to add a bit to a position, which I've been doing as the markets continue to fall. On the one hand, I know that whether I get the cash or the company reinvests it, the value of the investment is the same. On the other hand, I find the psychological impact of getting that money each month to be very real. I'm probably at the point where ~75% of the stocks I own pay dividends. Where's everyone else at on the board? Do you guys care about dividends or not?

I used to be pretty anti dividend growth investing. I enjoy finding obscure micro-caps, so the thought of buying JNJ or KO doesn't really appeal to me. Value investing is like finding a needle in a haystack. Dividend growth investing is pretty much the opposite. But I've changed my stance, at least sort of. I've been reading a lot of what Scott Hall has been writing about finding these long-term compounders that you can buy now and not worry about for a decade or two. He makes a whole lot of sense. Dividend growth and indexing is just another form of that. If you can generate a little bit of alpha using a passive approach, there's value there. Even if it just frees up time to play video games or read.

Francis Chou

After years of sitting on whatever I could find that was cheap, I got a nice office chair from Staples for $159 on sale, regular $269. My ass has never been so grateful.