This section is from the book "Practical Real Estate Methods For Broker, Operator & Owner", by Thirty Experts. Also available from Amazon: Practical Real Estate Methods for Broker, Operator, Owner.
First mortgages are a most desirable form of investment. Their interest return is higher than that of other equally high class securities, and their non-fluctuating quality, both as to interest and principal, commends them at all times as a conservative form of investment. The objections to investment in mortgages are:
(1) The inability to realize readily on such investments.
(2) The trouble sometimes experienced in collecting interest due; the necessity of investigating yearly if taxes and assessments - always liens prior to a mortgage - are paid.
(3) The comparatively short duration of mortgages as compared with State, municipal, or railroad bonds, with the consequent necessity of reappraisal of the mortgaged property at the expiration of the mortgage, with the possible necessity of reinvestment elsewhere, often with a loss of interest in the interval of non-investment.
The advantages before outlined have, however, been material enough to attract millions of dollars each year to this form of investment. The remarkable stability and constant rise in real estate in New York City have been a safeguard to investors that has practically prevented any loss of either principal or interest.
The chief and most difficult point for the investor in mortgages to determine is: the value of the property. The rate of interest, proper examination and insurance of title, and the drawing and recording of necessary papers also must have attention.
It has been said that in appraising property for a loan a more liberal figure should be placed upon it than if the appraisal is made with the object of determining immediate selling value. This to a certain extent is true. The immediate selling value of a piece of property may be agreed on and the purchaser may be willing to pay such a price, but in five years' time as the mortgagee may argue, the property will depreciate in value, and demands a conservative valuation for the purpose of a loan. The converse, however, is also true, and in this city has proven true more often than the former. Property has generally shown an increase in this city in almost every section, and has, in good locations, more than offset the depreciation which has taken place in the building itself. It is, therefore, quite possible and proper that in valuing property for the purpose of a mortgage loan, the elements of time, depreciation and appreciation, should be taken into consideration, and should be factors in determining the loan. It should be admitted that a loan of 75% of the value of property in a superior location, with a high class improvement upon it, is better security, and apt to be a more conservative loan five years thereafter, than a two-thirds loan on property poorly located and poorly built, where the depreciation of the improvement will not be offset by the increase in land value. Such is the argument which some of our largest lenders on mortgage have used in valuing property for lending purposes, and the theory has been more than justified by the results in practice.