A healthy pooled investment means a healthy amount of diversification within the fund. Mortgage Investment Corporations consider how diverse the projects are within a fund when deciding where to lend. Part of these considerations means looking at the proposed project’s cost, the building’s value, the current real estate market, and the type of development or real estate investment it is.
You may not think so, but land loans are one of the best things to invest in for a MIC. Sure, they may not seem overly exciting, but there is a reason why they make up a healthy piece of our pooled funds at Cooper Pacific. It can be challenging for borrowers to secure funding for a land loan through traditional institutions. For this reason, many borrowers look to MICs for land loans.
There are highs and lows in any investment market, and real estate is no exception — although it doesn’t experience the same extremes for the most part.
Imagine investing in a new development project, then real estate takes a dip. The units sit on the market longer than anticipated, and the borrower has difficulty paying back the loan. Consequently, this money can’t be re-invested efficiently into other projects to keep growing capital. The great thing about land loans is that the loan is given based on the value of the land, not the future dwelling. Because of this, there is less chance of the projected property value declining throughout the construction process or things shifting from a seller’s market to a buyer’s market.
On Vancouver Island, Victoria specifically, we don’t have the same dramatic shifts in real estate that other areas experience. The value of land is even more dependable.
Developers will often apply for a land loan through a MIC because it’s more efficient. However, the interest rate is usually higher than a traditional institution. A developer will take the land loan from a MIC and purchase the land. Then, they’ll look at securing the funding for the construction of the building from an institution with a lower interest rate. This method is ideal for a MIC as the loan will be paid back in a shorter term. Generally speaking, it’s best to have loan terms of 12-18 months as it is safer for the fund. It’s easier to set this term if the loan is on the cost of land only rather than construction, which can fluctuate in its projected duration for various reasons.
The other significant benefit of land loans is that they’re often smaller amounts. To fund a new development project can mean a loan of over 5 million in some cases. These larger amounts take longer to pay back and carry greater risk. Additionally, when a loan is paid back, it can be hard to re-invest quickly to optimize the fund if it’s a significant amount. Land loans are smaller and easier to re-invest, meaning more flexibility and greater opportunity for growth within the fund.
According to Cam Cooper, many of the funds at Cooper Pacific have a healthy portion allocated to land loans because of these benefits. Curious about how the pooled funds at Cooper Pacific are balanced and how to invest in a MIC? Contact Jordan on our team today.