I’ve been a private mortgage lender in Canada since 2013. I’ve issued loans in multiple provinces using my own money and have learned the business through trial-and-error. On balance, I think private lending is a great vehicle to generate passive income. But it would have been easier and less risky if I knew some important principles from the outset.
My name is Alexis Assadi and in this article I share 8 tips I wish I knew when I first started lending back in 2013. If you want more free knowledge about Canadian private lending, you can find articles, videos and courses here.
Collect a non-refundable deposit
One of the most helpful lessons I’ve learned in my lending career was the importance of collecting an upfront, non-refundable deposit. If you’ve been presented a lending opportunity, before beginning any research substantial or retaining a lawyer, you should request a deposit from the borrower.
Without this deposit, a private lender assumes all the initial risk. You can spend time and money reviewing documents, ordering appraisals and engaging counsel, only to have the deal collapse before funding. It’s common to discover surprises during your due diligence. Oftentimes borrowers neglect to tell you about obstacles that might make you think twice about lending. It’s usually not on purpose. They might not know what’s important to a lender or they might not remember certain details.
For example, they may fail to tell you they have unpaid property taxes. They might forget they own their property jointly with a family member and therefore need their approval to borrow against it. Oftentimes these challenges can be managed.
But I’ve also seen major oversights. In 2024, I had an opportunity to lend on a first mortgage in the Shuswap area of BC. But when we began our research, we saw that the borrower owed $700,000 on an undisclosed existing first mortgage. It turned out they actually needed a second mortgage, which was a significant change from how the deal was originally pitched. The new structure didn’t work for me. I was also concerned about such a massive misrepresentation. I therefore cancelled the deal. If I didn’t collect a non-refundable deposit, my time and money would have been wasted.
A properly structured deposit serves three key purposes:
First, it causes the borrower to commit. They are less likely to pull out of the deal or provide information that might not be accurate, knowing their money is on the line.
Second, it covers out-of-pocket expenses if professionals, such as lawyers or appraisers, have been retained.
And third, it ensures the lender is compensated for their time and preliminary work.
I discuss later in this article how you actually go about charging the deposit.
In terms of how much to charge, for smaller loans the deposit usually ranges between $1,000 and $3,000. It’s held in trust and credited toward closing costs if the loan proceeds. But it remains non-refundable if the borrower backs out. I usually charge what I think I might spend when hiring a lawyer and appraiser. I try not to create too many barriers. I have seen other lenders request much larger deposits, however.
Requesting this deposit also establishes you as a professional lender. Serious borrowers expect to pay it. Those who resist are often the ones most likely to waste time or fail to close. If they can’t afford a small deposit, it indicates financial distress.
There are private lenders in Canada who charge up-front deposits and purposely don’t fund. They basically take the fee and run. Not only is this illegal, but it’s an unsustainable business model. You will quickly gain a bad reputation in the lending market. Only request a deposit if you are serious about funding a loan.
Know how you will be repaid
Another significant lesson I learned early on was, before funding, to understand how and when your loan will be repaid. A lender should never advance funds without a clear, credible exit strategy in place. It doesn’t have to perfect, but it should be realistic.
If you know the exit strategy you can make plans for your capital when the loan matures. Perhaps you want to deploy it into another opportunity or meet personal financial goals. A delayed or uncertain repayment can be disruptive. Some lenders don’t mind the loan running longer and generating more interest. But you should still know an approximate repayment schedule.
If the borrower’s exit is a sale of the property, take the time to research the local market. Look at comparable listings, average days on market, inventory levels and recent price trends. This helps you assess whether the property can reasonably be sold within the loan term and at the expected price. Much of this information will be provided in the property appraisal, which you request during due diligence.
If the exit is a refinance try to understand what must happen for that to be achievable. It might be reducing overall debt, completing renovations, stabilizing income or repairing credit. The mortgage broker who connects you with the borrower will often have a plan to help them refinance with a bank or credit union. You should feel free to discuss that with them.
Ultimately, the responsibility for evaluating the exit strategy lies entirely with you. Borrowers will often provide a story or plan, but it’s up to you to verify whether it is actually feasible. A deal only works if the exit works.
Only consider “as-is” value
Many inexperienced private lenders are not aware of the next fundamental concept: only lend on the property’s current, “as-is” value. Avoid relying on its projected or “as-completed” value after construction or renovations. I’ve been presented deals where the asset is worth $400,000 but was told it will be worth $9 million after completion. That’s an extreme gap.
As lenders, we must always prepare for the worst-case scenario: the possibility of needing to foreclose before a project is finished. In that situation, your security is only worth what the property can sell for today, in its current condition.
Remember this rule of thumb: Always lend on what exists today, not on what might exist tomorrow.
Therefore, when ordering a property appraisal, make sure to request an “as-is” market value. Even if the report includes an “as-completed” value, it’s the “as-is” figure that should drive your loan-to-value calculation and risk assessment. That’s the number that protects your capital.
This principle also applies to commercial real estate, where valuations are often based on lease income. If a property becomes distressed, that income can disappear overnight. For that reason, I recommend assessing commercial assets as if they were vacant. View them as empty shells because that may be the condition you inherit if the deal fails.
By grounding your decisions in as-is value, you maintain a margin of safety and ensure that your capital is secured by something tangible and verifiable.
Hire the appraiser yourself
Property appraisals are the main way lenders assess the value of the collateral. The services of appraisers are essential. Some mortgage brokers will provide you with an appraisal when they present you with a lending opportunity. But it is important to hire the appraiser yourself, rather than allowing a broker or borrower to do it on your behalf.
It is not enough for the appraisal to be addressed to you and made for your reliance. The appraiser must know that you, the lender, are the client. While appraisers are expected to remain independent, in practice, a person’s sense of loyalty might lean toward the party that engaged and paid them. They could feel pressured to give an optimistic value so the deal funds. That way they can get referrals from brokers and other industry professionals. Large lenders often have a list of approved appraisers for this reason.
Most real estate appraisers I’ve worked with maintain high standards. But I’ve also been involved in files where outside parties try to dictate the minimum appraised value. When you hire and communicate with the appraiser directly, you’re more likely to receive an honest, conservative and accurate valuation. If the value is inflated by even five or ten percent, your entire loan-to-value ratio shifts. As such, you should retain the appraiser yourself and request that the appraisal report is addressed to you. By maintaining control over this process, you protect the integrity of your due diligence.
Issue a commitment letter
Before hiring professionals or doing any work on the deal, however, you should issue a formal commitment letter. This is sometimes referred to as an offer letter. It’s addressed from you to the prospective borrower. The document conditionally approves the financing, subject to specific terms and conditions. It captures the key details of the proposed deal, including the borrower’s legal name, the property address, the loan amount, the intended use of funds, the borrower’s stated income and exit strategy. You should include everything you have been told about the loan opportunity. The commitment letter also asks the borrower for an up-front, non-refundable deposit, which we discussed earlier in this article.
The commitment letter acts as the blueprint of the transaction. It protects the lender in two important ways.
First, it provides clarity. It puts the deal in writing and eliminates the potential for misunderstandings or “he said, she said” moments later.
Second, it serves as the written record of what was represented. If any of those details turn out to be inaccurate, you have clear documentation showing what was disclosed at the time of approval. That’s especially important if you have to cancel the deal.
Once the borrower signs the commitment letter and pays the deposit, you can begin your work. You can retain an appraiser. When ready, you can instruct your lawyer to prepare the loan agreement and other legal documents based on the commitment letter. This is the standard among professional lenders.
The borrower should cover your legal fees
Another standard practice in private lending is for the borrower to cover your legal fees. This ensures that the lender’s return on capital remains fully intact and that setup costs don’t erode profitability. In your commitment letter, you should explicitly state that your legal fees will be paid for by the borrower.
Legal expenses are usually rolled directly into the loan amount. For example, if you’re advancing a $100,000 loan and your lawyer’s bill is $2,500, the total reflected in the commitment letter and all legal documents should be $102,500.
By adopting this practice, you preserve your net return and reinforce that you operate as a professional lender. Mortgage brokers and serious borrowers recognize and expect this structure. It’s part of doing business in a properly run private mortgage transaction.
Review your lawyer’s work
Lawyers are crucial partners in every private lending transaction. They prepare and register the documents that legally secure your capital. But I’ve learned that even with the best lawyers, you must remain the final layer of quality control. No one cares about your money or your deal as much as you do.
It’s possible for lawyers to make small but meaningful mistakes. It can be a typo in a borrower’s name, a missed corporate entity or even an incorrect legal description copied from another file. These errors might seem minor at the time, but if the deal ever goes sideways, they can have serious consequences.
You should personally review all documents before funding. This includes the commitment letter, the loan agreement and the mortgage registration details.
Be especially careful to confirm that:
• The legal description matches the correct property; and
• The borrower’s names and corporate entities are accurate; and
• The registration order reflects the proper position — for example, first versus second mortgage.
In private lending, you can delegate the work, but don’t delegate the responsibility. Double-check every detail. This ensures your security holds up when it matters most.
Include a buffer for enforcement fees
Finally, from the very first day you evaluate a deal, it’s important to mentally and structurally factor in the potential costs of foreclosure. Think about what might happen if the borrower doesn’t pay you back.
Since 2013 I’ve come close to foreclosing a few times. In most cases the borrower will do all within their power to avoid losing their real estate. In fact, I’ve been offered bonus payments to stop the foreclosure process. I’ve only ever had to go through with it once, where we went to court and sold the property.
However, an experienced private lender recognizes that enforcement can be a reality. You will incur legal fees in doing so, which are usually recoverable. But you should make sure there’s enough equity to pay back your loan plus your cost of foreclosing.
I always build in an internal financial buffer of $25,000 for potential enforcement costs. If I’m lending $100,000 I assess the deal as though it’s $125,000. I never want to foreclose, but I’m prepared if I have to. I make sure I give myself a good margin of safety if things go wrong.
In doing so, the mortgage amount on title is registered as $25,000 more than the loan. So if I lend $100,000, when you run a title search you’ll see a $125,000 mortgage on the property. This doesn’t mean the borrower owes extra. It’s just the amount of the security instrument. It can make it easier to recover legal fees if I have to foreclose. This is always laid out in the Commitment Letter.
Summary
Let’s recap this article.
First, collect an up-front non-refundable deposit from the borrower before starting meaningful work on the file.
Second, understand the borrower’s plan to repay your loan.
Third, only lend on the property’s current, “as-is” value.
Fourth, hire the real estate appraiser yourself.
Fifth, early in the process issue a Commitment Letter that both you and the borrower sign.
Sixth, review your lawyer’s work and be accountable for all aspects of the file.
And seventh, factor in the costs of foreclosure in your initial due diligence.
I’ve created several free resources for aspiring and professional private lenders in Canada. If you’re an industry participant, like a mortgage broker, real estate agent or a lawyer, you’ll also benefit from them. You can access them at assadicapital.com/learn.