Lisa is an experienced real estate investor and house flipper based in Toronto. She identifies a distressed property listed for $600,000 in a desirable neighbourhood. The house requires $100,000 in renovations, but after the improvements, it is expected to sell for $850,000, providing a substantial profit.
Lisa has a strong track record in real estate, but traditional lenders refuse to finance the property for the following reasons:
- Property Condition: The home is in poor condition and deemed “uninhabitable”, making it ineligible for a bank mortgage.
- Short-Term Financing Needs: Banks prefer long-term mortgages, while Lisa needs only 6-12 months of financing.
- Debt Service Ratios: Lisa already holds multiple properties, and adding another mortgage affects her ability to meet the bank’s strict debt ratio requirements.
How a Private Mortgage Helped
Since no bank would approve financing for this flip, Lisa worked with a private lender to structure a short-term, high-leverage mortgage.
âś… Loan Approved: A private lender provided a $500,000 mortgage (83% Loan-to-Value) to fund the property acquisition.
âś… Renovation Budget: Lisa used her own funds and a $100,000 second private mortgage to complete renovations.
âś… Fast Funding: The private mortgage was approved in 5 days, allowing Lisa to purchase quickly and start renovations immediately.
âś… Interest-Only Payments: The loan had a 9% interest rate, but since it was an interest-only loan, her monthly payments remained low.
âś… 12-Month Term: The short-term mortgage gave her enough time to renovate and sell the property for a profit.
The Exit Strategy
Because private mortgages are not designed for long-term financing, Lisa’s goal was to sell the property quickly and repay the loan:
- Completed Renovations in 4 Months: She transformed the outdated home into a modern, high-demand property.
- Listed for $850,000: Market conditions remained strong, and she listed the home at her target price.
- Sold for $840,000 After 30 Days on Market: She accepted a solid offer and closed within 60 days.
- Repaid the Private Mortgage: After selling, she repaid the $600,000 private mortgage + interest and fees while keeping a $120,000 net profit after expenses.
Final Outcome
- Without a private mortgage, Lisa would have missed the deal because no bank would finance an uninhabitable home.
- With a private mortgage, she acquired, renovated, and sold the home within 6 months, earning a six-figure profit.
- She reinvested her profit into her next house flip, growing her portfolio.
Key Takeaways
- Private mortgages are essential for house flippers and real estate investors who need fast, flexible financing for short-term deals.
- Banks do not fund distressed or uninhabitable properties, making private lenders the best option for property flips.
- A clear exit strategy (selling or refinancing) is crucial to ensure the private mortgage is repaid on time and profits are maximized.
Summary
Lisa, a seasoned real estate investor and house flipper in Toronto, identified a distressed property with strong profit potential but was unable to secure traditional financing due to the home’s poor condition and short-term nature of her project. A private lender approved an $500,000 mortgage at 9% interest, allowing her to acquire the property quickly, while a second private loan covered the $100,000 renovation costs. Within four months, Lisa transformed the home and sold it for $840,000, repaying the private loan and netting a $120,000 profit. This case highlights how private mortgages provide fast, flexible financing for investors dealing with uninhabitable properties, enabling them to capitalize on real estate opportunities that banks typically reject.
