Private Lending as an Investment Strategy: Becoming the Bank

How Canadian real estate investors use private lending to target 8%–12% returns via mortgage positions, risk assessment, and MICs.

July 29, 2026 · 13 min read

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Private Lending as an Investment Strategy: Becoming the Bank

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canonicalTopicId: private-lending

You’ve spent years buying, renovating, and renting properties. You understand real estate better than most people on the planet. And now you’re sitting on capital—maybe from refinances, maybe from sales, maybe from years of cash flow—and you’re wondering if there’s a way to earn strong returns without managing another property.

There is. You can become the bank.

Private lending means you provide mortgage financing directly to other real estate investors or borrowers. They pay you interest—typically 8% to 12% annually in Canada—secured by their property. You hold a mortgage registered on title, just like a bank would. If they don’t pay, you have the legal right to foreclose and recover your capital from the property’s sale.

It’s not passive in the way that owning index funds is passive. You need to understand what you’re doing. But compared to managing tenants, contractors, and renovations, private lending is a different kind of work. More analysis upfront. Less ongoing headaches.

I’ve watched investors use private lending in two ways: as a primary investment strategy for capital they want to deploy without buying more properties, and as a bridge strategy to park capital between acquisitions. Both work. Let me show you how.

Mortgage Investment Basics

When you lend money as a private mortgage lender, here’s what actually happens:

A borrower needs financing that banks won’t provide—maybe they’re buying a fixer-upper, need a short-term bridge loan, or don’t qualify conventionally.
You agree to lend them a specific amount at a specific interest rate for a specific term.
Your lawyer registers a mortgage against the borrower’s property. This gives you a legal claim on the real estate.
The borrower makes interest payments to you (usually monthly).
At the end of the term, the borrower repays the principal—typically by refinancing with a conventional lender.

That’s it. You’re acting exactly like a bank, except you’re making the lending decisions yourself and keeping all the interest income.

Typical private lending terms in Canada:

Term	Common Range
Interest Rate	8%-12% annually
Loan Term	6-24 months
Loan-to-Value (LTV)	65%-80% of property value
Payment Structure	Interest-only monthly
Lender Fee	1%-3% of loan amount (paid at closing)

On a $200,000 private mortgage at 10% interest with a 2% lender fee, you’d earn $20,000 in annual interest plus $4,000 in fees. On a 12-month term, that’s $24,000 on $200,000 deployed—a 12% return. Try getting that from a GIC.

Risk Assessment: The Most Important Skill You’ll Develop

Here’s the truth. Private lending can be very profitable. It can also be very painful if you lend to the wrong borrower on the wrong property.

I’ve seen private lenders lose significant money. Usually it’s because they skipped the due diligence and got blinded by the interest rate. An 11% return sounds great until the borrower defaults and the property is worth less than the mortgage. Then you’re in a foreclosure process that takes 6 to 18 months and costs $15,000 to $40,000 in legal fees.

Here’s how you assess risk properly:

The property is your security, not the borrower. Yes, you want a borrower with a reasonable credit history and a track record. But the property is what protects you. If the borrower stops paying, you need to be confident you can sell the property and recover your full principal plus costs.

Loan-to-Value is everything. If you lend at 65% LTV, the property value would need to drop 35% before your principal is at risk. At 80% LTV, a 20% decline puts you underwater. In most Canadian markets, a 65% to 75% LTV on a private mortgage gives you reasonable protection. I wouldn’t go above 75% for a first mortgage or 65% combined LTV for a second mortgage.

Get your own appraisal. Never rely on the borrower’s appraisal. Order your own from an appraiser you trust. A $400 appraisal fee is cheap insurance on a $200,000 loan.

Understand the borrower’s exit strategy. How are they going to repay you? If they’re buying a property to renovate and refinance, does the after-repair value support a conventional mortgage large enough to pay you off? If they’re selling, is the market supporting their expected sale price? A borrower with no clear exit strategy is a borrower who won’t repay on time.

Verify insurance. The property must be insured, and you must be named as a loss payee on the insurance policy. If the building burns down, the insurance payout goes to you (up to your mortgage amount) before the borrower sees a dollar.

Check for other liens. A title search will reveal any other mortgages, liens, or encumbrances on the property. You need to know exactly where you stand in the priority order.

First Position vs. Second Position: Know Where You Stand

This is critical. The position of your mortgage determines what happens if things go wrong.

First position (first mortgage): You are first in line. If the property sells in a foreclosure or power of sale, you get paid first. This is the safest position. You only lose money if the property sells for less than your mortgage amount plus foreclosure costs.

Second position (second mortgage): The first mortgage holder gets paid first. You get whatever is left. This is riskier. If the property sells for just enough to cover the first mortgage, you get nothing.

Example: A property is worth $400,000. There’s a $250,000 first mortgage and your $75,000 second mortgage. Total lending: $325,000 against $400,000 value (81% combined LTV).

If the borrower defaults and the property sells for $350,000 in a power of sale:

First mortgage gets: $250,000 (fully repaid)
Legal and sale costs: $30,000
You get: $70,000 (you lose $5,000)

If it sells for $300,000:

First mortgage gets: $250,000
Legal and sale costs: $30,000
You get: $20,000 (you lose $55,000)

Second position lending commands higher interest rates—typically 10% to 14%—because the risk is higher. If you’re going to lend in second position, keep your combined LTV (first mortgage plus yours) below 70% and charge a premium for the additional risk.

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Legal Documentation: Don’t Cut Corners

Private lending without proper legal documentation is gambling, not investing. You need a real estate lawyer handling every transaction. Here’s what the documentation package looks like:

Mortgage commitment letter. This outlines the loan terms: amount, rate, term, payment schedule, fees, and conditions. The borrower signs this before you fund the loan.

Registered mortgage. Your lawyer prepares and registers a mortgage (or charge) on the property’s title. This is your legal security interest. Without this, you’re an unsecured creditor—which means you have virtually no protection.

Personal guarantee. If the borrower is a corporation (and many investors borrow through corporations), get a personal guarantee from the principals. The corporation might have limited assets beyond the property. A personal guarantee gives you recourse against the individual’s other assets.

Assignment of rents. If the property is a rental, this document gives you the right to collect rents directly from tenants if the borrower defaults. It’s your income protection while you work through the foreclosure process.

Insurance confirmation. Written proof that the property is insured and you’re named as a loss payee.

Independent legal advice (ILA) certificate. Your lawyer should require the borrower to obtain independent legal advice from a different lawyer. This protects you from future claims that the borrower didn’t understand what they were signing.

Legal fees for a private mortgage typically run $1,500 to $3,000. The borrower usually pays these as part of the closing costs. Never skip the legal work to save a few dollars. One improperly documented loan can cost you the entire principal.

Do this every time. Don’t fund a dollar until your lawyer confirms the mortgage is registered, the insurance is in place, and every document is signed. I’ve seen investors try to “keep it simple” with a handshake and a promissory note. That works until it doesn’t—and when it doesn’t, you have no registered claim on the property. You’re just another unsecured creditor fighting for scraps.

Interest Rate Setting: Finding the Right Number

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Your interest rate needs to reflect the risk of the specific deal, not just “what private lenders charge.” Here’s my framework:

Start with your baseline: the return you could earn with zero effort. A GIC pays roughly 3.5% to 4.5%. That’s your floor. You wouldn’t lend privately for anything less than double that because you’re taking on real risk and doing real work.

Add a risk premium based on:

LTV. Lower LTV = lower rate. An LTV of 65% on a detached house in a strong market might command 8% to 9%. An LTV of 80% on a condo in a softer market might command 11% to 12%.
Property type. Residential is safer than commercial. Single-family is safer than multi-unit (for private lending purposes). Raw land is the riskiest—I’d want 12% or more for land deals.
Borrower experience. A borrower who’s done twenty successful renovations is lower risk than a first-timer. Adjust your rate by 0.5% to 1%.
Mortgage position. First mortgage rates are lower than second mortgage rates. Add 2% to 3% for second position.
Term length. Shorter terms (6 months) carry less risk than longer terms (24 months). The longer your money is out, the more can go wrong.
Market conditions. In a hot market with rising prices, your LTV cushion naturally improves over time. In a declining market, it erodes. Charge more when markets are uncertain.

Lender fees (points). Most private lenders charge a 1% to 3% fee on the loan amount, collected from the borrower at closing. This compensates you for the time and cost of underwriting the deal. On a $200,000 loan, a 2% fee is $4,000 in your pocket on day one.

MIC vs. Direct Lending: Two Ways to Be the Bank

You have two main paths into private mortgage investing:

Direct lending means you make individual loans directly to borrowers. You control every aspect—which deals to fund, what terms to offer, how much to lend. It’s more work and more concentrated risk, but you keep all the returns and make all the decisions.

Direct lending works best when you:

Have $200,000 or more to deploy
Want control over every lending decision
Have real estate experience to assess properties
Can handle the occasional default and workout process
Want to build personal relationships with repeat borrowers

Mortgage Investment Corporations (MICs) pool capital from multiple investors and lend it out as a portfolio of mortgages. You buy shares in the MIC, and the MIC’s management team handles all the underwriting, documentation, and servicing. You receive regular distributions—typically 6% to 10% annually.

MICs work best when you:

Have $25,000 to $200,000 to deploy
Want diversification across many mortgages
Don’t want to personally manage lending activities
Want regular monthly income without deal-by-deal decisions
Prefer professional management even at the cost of lower returns

The key differences:

Factor	Direct Lending	MIC Investing
Minimum Investment	$50,000-$200,000+ per deal	$25,000-$50,000 typical
Return Range	8%-12%+ annually	6%-10% annually
Diversification	Concentrated (1 deal at a time)	Diversified (dozens of mortgages)
Control	Full control	No control
Work Required	Significant per deal	Minimal
Liquidity	Locked until term ends	Usually redeemable quarterly
Management Fees	None	1%-2% annually

A word on MIC due diligence. Not all MICs are created equal. Before investing, examine their historical returns, default rates, average LTV, geographic concentration, and management experience. Ask for their audited financial statements. A MIC that’s been operating for ten or more years with consistent returns and low default rates is worth a lot more than a startup MIC promising sky-high returns.

Regulatory Considerations

Private lending in Canada has regulatory boundaries you need to understand.

Mortgage broker licensing. In most provinces, arranging mortgages for others requires a mortgage broker licence. If you’re lending your own money directly to a borrower you found yourself, you generally don’t need a licence. But if you’re arranging loans for others or using a third party’s money, licensing requirements may apply. Check your provincial regulator.

Securities regulations. If you’re raising capital from others to lend, you may be creating a security—like an investment fund or syndication—which triggers securities law requirements. MICs are specifically structured to comply with securities regulations, which is one reason they exist as a vehicle. If you’re pooling money from friends and family to do private lending, consult a securities lawyer first.

Anti-money laundering. As a private lender, you should know your borrower. While you’re not subject to the same reporting requirements as banks, lending to someone without understanding where their funds come from or what the property will be used for creates risk you don’t want.

Tax treatment. Interest income from private mortgages is taxed as regular income—the same rate as employment income. It doesn’t get the capital gains treatment. If you’re earning $50,000 in interest annually, plan for a significant tax bill. Some investors hold their private lending activities inside a corporation to defer the tax, though the passive investment income rules may apply.

Usury law. Under the Criminal Code of Canada, charging more than 60% annual interest is a criminal offence. You’re not going to hit this threshold with typical private lending rates, but be aware of how lender fees and compounding affect the effective annual rate. A 12% interest rate plus a 3% lender fee on a six-month loan has an effective annual rate much higher than 12%.

Building Your Private Lending Business

If you decide to pursue direct lending, here’s how to build it methodically:

Start with your network. Your first deals will come from people you know—other investors, contacts from real estate meetups, referrals from your mortgage broker. These are the safest deals because you can verify the borrower’s track record personally.

Set clear lending criteria and don’t deviate. Write down your maximum LTV, minimum property value, acceptable property types, geographic area, and rate structure. When a deal doesn’t fit your criteria, pass on it. There’s always another deal.

Build a relationship with a real estate lawyer who handles private mortgages. They’ll review your documents, register your mortgages, and advise you on enforcement if needed. A good lawyer who specializes in this area is worth their weight in gold.

Start with first position mortgages only. Get comfortable with the process, the documentation, and the borrower assessment before taking on second position risk. First position at 65% to 70% LTV in a market you know well is the lowest-risk way to learn private lending.

Keep reserves. Don’t deploy 100% of your available capital into private mortgages. Keep 15% to 20% in liquid reserves for legal fees if a borrower defaults, or to fund a new deal when one repays early. Cash flow timing in private lending is lumpy—loans repay on their own schedule, not yours.

Frequently Asked Questions

Ready to explore your financing options? Book a free strategy call with LendCity and let our team help you find the right path forward.

How much capital do I need to start private lending?

For direct lending, you'll typically need $100,000 to $200,000 minimum for a single first-position mortgage, depending on the market. Smaller amounts are possible for second mortgages but carry more risk. For MIC investing, most funds accept initial investments of $25,000 to $50,000. Start with one deal or one MIC investment before committing larger amounts.

What happens if my borrower stops making payments?

First, you'll issue a formal demand letter through your lawyer. If the borrower doesn't cure the default within the notice period (typically 35 days in Ontario), you can begin power of sale proceedings. The process takes 4 to 12 months depending on the province and whether the borrower contests. Legal costs run $15,000 to $40,000. This is why LTV discipline is critical—you need enough equity cushion to cover the outstanding loan, accrued interest, and legal fees from the property's sale.

Can I use my RRSP or TFSA for private mortgage lending?

Yes, with restrictions. You can hold qualifying mortgages inside a self-directed RRSP or TFSA, but the mortgage must be administered by an approved trustee (like a trust company), and it cannot be a mortgage on property you or a related person owns. MIC shares can also be held in registered accounts, making them a simpler option for tax-sheltered mortgage investing. The administration fees for holding a direct mortgage in a registered account typically run $500 to $1,500 annually.

How is private lending income taxed in Canada?

Interest income from private mortgages is taxed as ordinary income at your full marginal rate—the same as employment income. Lender fees are also taxed as income. If you hold private mortgages inside a corporation, the income is considered passive investment income taxed at approximately 50% at the corporate level, with a portion refundable when paid out as dividends. MIC distributions are treated as interest income to the investor. There's no preferential tax treatment like capital gains.

Should I lend on raw land?

Raw land is the riskiest type of private mortgage lending. Land generates no income, is harder to appraise accurately, takes longer to sell in a default scenario, and can have hidden environmental or zoning issues. If you do lend on land, keep your LTV below 50%, charge a significant premium (12% to 14%), and make sure the borrower has a clear development plan with municipal approvals. Most experienced private lenders avoid raw land entirely until they have years of lending experience.

What's the difference between a MIC and a mortgage syndication?

A MIC is a regulated corporation that pools investor capital and lends it across multiple mortgages. Investors own shares and receive distributions. A mortgage syndication is a group of investors pooling money for a single specific mortgage. MICs offer diversification and professional management. Syndications give you more transparency into the specific deal but concentrate your risk in one loan. MICs are regulated under the Income Tax Act with specific requirements; syndications may trigger securities regulations depending on how they're structured.

How do I find borrowers for private mortgage deals?

The best source is mortgage brokers. Tell brokers you work with that you're available for private lending and give them your criteria (LTV limits, property types, geographic area, rate expectations). Brokers regularly have clients who need private financing and will bring deals to you. Real estate investor networks and local meetups are another source. Avoid advertising directly to the public, as this may trigger mortgage brokerage licensing requirements in your province.

Can I do private lending and still buy rental properties?

Absolutely. Many experienced investors allocate a portion of their capital to private lending and the rest to property acquisitions. Private lending generates consistent cash flow with less management, while property ownership builds long-term equity and appreciation. A common split is 60% to 70% of capital in owned properties and 30% to 40% in private mortgages. Private lending also gives you flexibility—when a great acquisition opportunity appears, you can stop funding new mortgages and redirect that capital into a purchase.

Disclaimer: LendCity Mortgages is a licensed mortgage brokerage. Content on this page is for educational purposes only and does not constitute legal, tax, investment, securities, or financial-planning advice. Rates, premiums, program terms, and regulations referenced are as of the page's last updated date and are subject to change. Any investment returns, rental yields, tax savings, or case-study figures shown are illustrative only — they are not guaranteed, not typical, and individual results will vary. Consult a licensed lawyer, Chartered Professional Accountant, or registered dealer before acting on any information above. Editorial standards.

Written by

LendCity

Published

July 29, 2026

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13 min read

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