Welcome to the 16th episode of the #AskAPrivateLender Podcast brought to you by Mortgage Automator. In this episode, our guest is Chris Allinson, COO & Co-Founder of Nest Capital, a MIC operating in Ontario.
Chris told us about how he got started in the business, Nest’s lending preferences, and shared some great insights for the brokers. We also introduce a new segment where Joseph and Lawrence discuss important industry matters.
Listen, watch, or read the interview below. And stay tuned for more episodes coming up!
Lawrence: The first thing that I want to talk about is how you co-founded Nest Capital?
Chris: It all started in terms of our family’s interest in real estate. Roughly in 2008, we started purchasing residential single-family properties across Ontario. Did that kind of first route being into the real estate business with being landlords. It was actually our good family friend and mortgage broker that said, “Hey, why don’t you get into private lending?” He kept nudging Roger, my father and co-founder of Nest, “Check out private lending.” He said, “Nah, I’m making my money. I’m going to sit back and watch the home values increase over the years.” Then I think dealing with tenants for a couple of years and having some nightmare stories there, he said, “Okay, let’s look at what this private lending thing is.”
Before we started Nest Capital, we were lending out our own nest egg on individual mortgages. Did that for about four years where we learned the business, understanding underwriting, and evaluating each individual mortgage deal. We did about 65 mortgages during that time and really fell in love with the business. We took our money out of the stock market around that time and devoted the family’s money to mortgages.
Then I kind of had a light bulb moment with Roger around the holidays one year and basically said, “Well, what are you doing? I took a package from a software company. Do you want to start a company together?” That’s kind of the starting point to Nest Capital that it all ultimately led from a strong passion for real estate in previous forms.
Lawrence: You’re lending out your family’s money. I think that should provide a lot of comfort with your investors that it’s not like you’re just jumping out of the gate. You perfected your process with your own capital, then you went and started raising outside capital.
Do you do predominantly second mortgages?
Chris: Yeah, that’s correct. About 90% of what we do are second mortgages and a sprinkling of firsts at the moment.
Lawrence: Is that more so because of the return or the size of the loans?
Chris: It’s a combination of both. With our history predating Nest Capital, we enjoyed those returns that second mortgages bring. We thought, “Wouldn’t it be great if we had a mortgage investment corporation that produced double-digit returns for investors.” We set our eyes on that 10% targeted return and we’ve been able to hit that historically each year. Then a byproduct of that is typically second mortgages are smaller dollar value, which allowed us to sprinkle it even further across many different deals.
Lawrence: You must have a lot of loans on the books then if you’re doing seconds?
Chris: Yeah. I think we have close to 100-125 at the moment, which we cycle in and out.
As you said, the addictive nature of the business, find that next deal and keeping the investor satisfied.
Lawrence: How would you say your borrower retention is? The performing ones, the ones that don’t give you a headache, is there anything that you do specifically to try and keep those loans on the books?
Chris: Yeah, sure. I mean, our approach to borrowers is one of strong, ethical values. If they were late for a payment, it’s nice phone calls, a simple email, understanding that the environment that we’re living in, people are going through some challenges. When it comes to the renewal, we do give them the option to renew. That’s always available to them. The renewal fees we’ve capped, and we keep them pretty minimal. We just capitalize or roll that into the principal balance so we’re not expecting a renewal fee check from them.
Their monthly interest payment may go up $20-$30. Any other fees are just like an annual fee that we add on. It’s not too much for a borrower to continue. We do see quite a few renewals. It is a short-term loan at the end of the day, so we do encourage them to seek out some better options because we do pride ourselves in helping out borrowers. Myself and Roger being in sales and other forms prior to this, we’ve gotten more thank-you’s from lending money than any other sale that we’ve done. It is a good feeling. We make it easy for the borrower to renew or sometimes we might change the rate to make it easy if they need an extension. We do that as a case by case.
Joseph: I’m going to guess that you’re helping people with debt consolidations or people in slightly more financially dire situations, where this cashflow or this consolidation of debt really allows them to get their life back on track?
Chris: Absolutely. A good chunk of what we do is helping people to get out of debt. There are a lot of lenders out there unfortunately that have some high-interest debt of 19%, 21% on credit cards, or even more. It really gives them the option to get out equity from their home and utilize that for a year. We would then instruct our real estate lawyers to pay off these debts. Over time, usually a year, a year and a half, and that’s why we renew because it does take some time to have the borrower’s credit bounce back, then they kind of seek out some other options. Maybe they’re refinancing their first to pay us out. But, that’s exactly it. It’s providing them an alternative, an option in an area that’s underserved and the options aren’t as many.
Lawrence: Do you go directly to consumers or do you deal with a handful of brokers?
Chris: We have our own mortgage administrator, but we do work directly with mortgage brokers and agents. We don’t work directly with individual borrowers, but we’ve developed probably two dozen relationships with individual brokers and agents that are feeding us mortgage deals on a consistent basis.
Lawrence: That relationship between lender and broker. It needs to be solid. Is there a piece of advice that you would give brokers on how they should properly submit deals? Or something that you see with your top guys that you think would help them at the end of the day deal with private lenders?
Chris: I think the biggest piece of advice would be don’t feel burdened with trying to get all the information wrapped up in an application. Just start with your client, the mortgage applications, credit bureau, appraisal, if there is one available. Start communication that way with us, because that gives us plenty to review.
Then those that were doing a lot of high volume, create a bit of a story on why the borrower needs the funds. Are they paying off some debts? Or perhaps it’s growing their business. In addition to the use of funds; exit strategy. Is this going to be one that needs to be a two-year type of mortgage, renewing after the first 12 months? Or are they going to be refinancing with a different lender after 12 months?
Joseph: That extra five minutes that the broker can take to really understand the file to then come to you fully prepared is important. If these guys can learn and understand what your needs and wants are on day one, the answers that they’re going to be getting will be much quicker. The turnaround time on files will be much faster as well.
Chris: If it’s a new relationship, we help guide them. “Here are the top 3-5 things that we’re looking for.” If a new application comes in, great. Just a reminder, people like that extra nudge and approach versus kind of dismissing it because it doesn’t fit into the framework that we have set. We’re flexible.
Lawrence: What do you like to see LTV-wise, loan size-wise? Location?
Chris: Our bread and butter is across Ontario. I think the most Northern point we’ve gone to is Sudbury, but we’re not a GTA-only lender. We have areas in Ottawa to Windsor and everything in between. Small-dollar value, second mortgages on residential properties—if you’re in that area, that’s what we look for.
We do go up to 85% loan-to-value, which is helpful for certain brokers and borrowers. We do offer prepaid interest. The borrower doesn’t have to pay interest for the year if the math works for the file. That’s been a popular point these days. A recent appraisal, that is key. There is kind of a max dollar amount that we would look at. Anything under say, $400,000 is good. If you’re looking at a second at a million, which would have to be quite a nice property, we’d probably pass on that. But the average mortgage that we’re doing is about $100,000 on residential across Ontario.
Lawrence: What would you say is the most memorable deal that you’ve ever had?
Chris: Not the most memorable, but memorable because we’ve seen it before and funded it before a couple of years ago and then kind of came back to it. It was nice to see that they’ve improved their financial situation.
It was a father and son contracting business. They couldn’t get a business loan because it was pretty tough. I think they took out maybe $150k on their primary residence. I think they actually paid out earlier and said, “Thank you very much. That allowed us to grow the business.” I think to this day they probably don’t need a second mortgage. It kind of let them leapfrog to a point that they’re at today. I think that stood out in some similarity to myself and Roger being a father and son team growing a business. Here we are, have helped them in a way with a mortgage that kind of acted like a business loan.
Lawrence: You must be doing something right if people are reaching out and thanking you for the help that you’ve provided them. Is there a difference from when you were doing it yourself and just lending your own money out to now you have this company?
Chris: Our selection of mortgages in terms of lending parameters and evaluating has been solid from the beginning. Nowadays we don’t go behind private first mortgages for example, but whether it was our own funds before starting Nest, we would consider that and have done it.
I think there’s more care and focus in terms of the operations of the business. What’s great is Mortgage Automator really came in and made a huge difference for us versus doing things in Excel. Putting the systems in place to carry on with that well thought out lending strategy but doing it in a bigger sense.
Lawrence: I promise you, no money changed hands for that, but we do really appreciate the kind words, Chris.
You have a bunch of investors now. I’m sure there are some really wealthy ones that you deal with or you’ve dealt with. What would you say is a good piece of money-related advice that you’ve received from any of them?
Chris: Protect your capital, protect the principal, look at diversifying. But in our family, we’ve put all our money in mortgages and been happy with it.
Another key point is if you’re tired of how some accounts of yours are performing, that’s the time to act. If you’re doing spring cleaning of your place each year and throwing out a bunch of stuff or donating it, that’s what you should be thinking about in terms of your investments. Research those, ask the right questions, and find out more.
Lawrence: I hear this time and time again, where the money managers, the people who are in the business, who understand the business, they don’t diversify. They understand that it is probably the best investment that you can make as far as the return you’re receiving.
The risk. I mean, it’s a phenomenal investment tool, which is why I feel like investors even get addicted to it. It’s not like the stock market where there’s one major player who decides to turn the market, and they can do it.
Over the years, has anything ever slipped through the cracks? Have you ever experienced fraud?
Chris: We have not. No. It all comes down to, I mean, the lawyers, the mortgage brokers that we used before we started Nest, we just carried that on. We already had that relationship in place. Even our registered dealers are very well known. They do a really good job on the investor side. We haven’t experienced any loan loss for example. We may have had a borrower that was all confused about the mortgage that he had, whether it was done properly, but we just go back to what’s papered and what’s there.
It is important for lenders and investors to think about who else is part of the team. Evaluating mortgages, doing the legal work, approving investors, all that is key. We’ve luckily surrounded ourselves with some very trusted advisors.
Lawrence: What was your view on COVID?
Chris: We took a pause in terms of new mortgages for about two months. Then we did some serious kind of number crunching and figured okay, what reserves should we be keeping if the deferred mortgages, at the time it was under 10% of our pool, jumped up to 25% or 50%, some really exaggerated numbers. We already built in that reserve. We continued that probably until the fall and realized the deferrals dropped down, and now they’re non-existent.
Then we kept our ears open to other reputable lenders. Are they lending? Should we maybe consider it again? But until we were comfortable with the numbers and how it played out, we pumped the brakes.
Lawrence: I did notice that there was a trend with the consumer themselves that people did not want to borrow money knowing they could not pay it back because they, for the first time in a very long time, weren’t sure if the house was actually going to go up in value to get them out of that mess. Whereas most years it’s like, “Oh, my house is going to go up again.”
This year is a perfect example, if you did 85 last year at 75 this year or 70 this year, people are like, “Oh, I can go maybe borrow more money.” But I think for the first time people were like, “We don’t know what’s going on. We’ve never seen something like this before. I don’t know if I’m going to be a hero and try to pull off some risky investment play or build something on spec or just borrow money. Because I don’t know if I will be able to pay it back, because I don’t know how long CERB is going to be around for.” It was interesting to see sort of a different move point in the market as well.
Chris: I think the ones from a borrower perspective that full steam ahead are kind of that real estate investor landlord with multiple properties. They have kept on accessing equity in the second mortgage. That traditional ‘let’s consolidate some debt’ type of borrowers. Yeah, we noticed a bit of change for a few months there, but overall it didn’t impact a whole lot.
Lawrence: I have respect for all lending companies. I understand what they do on a day-to-day basis. If you choose to keep pushing ahead, kudos to you, but it’s just such an unknown. It’s hard to know what’s going to happen on the other side.
You deal with two dozen brokers, maybe more, maybe a little less. For people listening that want to submit a deal to you, who do they contact?
Chris: If you want to just get that deal submitted and click send, you can submit it via Filogix or Lendesk to Nest Capital Mortgage Investment Corporation, likely Nest Capital. I don’t know if all those words fit in the dropdown menu. If you have other documents, you want to send me an email at chris.allinson(at)nestcapital.ca, or just simply go on our website and you’ll have all our contact details there.
Lawrence: What’s the turnaround?
Chris: We’ll tell you if we’re going to do the deal probably in a couple hours. We can get the commitment out the same day. I mean, that’s key because usually, the brokers are talking to us. Sometimes the borrower is right there and they’re trying to get the deal and get it confirmed. The quick turnarounds are important to us. We don’t ask for so much in terms of supporting documents, just get in the basics and we’ll go from there.
Lawrence: Chris, thank you. I really appreciate it.