Even though interest rates are increasing, real estate investors remain active as the market continues to evolve. However, traditional banks continue to be more conservative than ever in the wake of the last recession and in the midst of a global pandemic, making it challenging for real estate investors to secure financing. How do real estate investors fill the gap? By getting funds through a hard money lender.
By investing in mortgage funds, hard money loans, or hard money loan funds—all commonly referred to as private lending—you can capitalize on the boom in real estate investment and generate passive income without taking on the hard work of flipping homes or managing rental properties. Private lenders are funded by investors who get returns from the interest on the loans the lenders provide.
As one of the best investments to beat inflation, the real estate market—particularly for retail, multi-family, and industrial properties—is likely to stay active despite rising interest rates. Why not cash in on the action by investing in real estate debt? It’s a win-win for all involved. If you’re thinking about investing in private lending, consider these four benefits.
Because private lenders maintain a portfolio of equity-based loans, even when some borrowers default, investors still get monthly or quarterly returns from the other loans that are performing. This is why many investors choose to invest in hard money loan funds, rather than just a single loan at a time. Just as with other types of investments, this type of diversification serves to mitigate risk for investors.
Hard money loans or debt investments are also at the bottom of the capital stack, which means they get paid back first, before equity partners. Loans are secured by the property, so if the borrowers don’t pay back the principal, the fund can foreclose on the property and sell it to recover the principal for investors.
With real estate debt investing, your money is only tied up for a short period of time: anywhere from six months to two years. Many investors like the comfort of knowing that some of their investments are more liquid than others—another great reason to diversify by investing in mortgage funds. Always be sure to check with the sponsor about the official terms and conditions so you know how long the lockup period is for the fund you are considering. Returns begin almost immediately, and you get a monthly or quarterly return for the duration of the agreement.
With debt investing, you get either a fixed monthly return on an individual loan or a steady return if investing in a mortgage fund. When you work with a fund manager with rigorous underwriting and collections practices, you know that as long as you leave your investment where it is, you’ll get returns on it. Returns are also more consistent, so you can have a good sense of how much you’ll be earning each month or quarter. If predictable passive income is the dream, investing in mortgage funds can help you get there.
Although no investments are completely risk-free, debt investing through a private lender can be relatively low-risk when the loans are structured with low loan-to-value ratios and proper underwriting. Of course, it’s also important to choose a lender that manages their portfolio in alignment with your risk tolerance, so learn about the types of loans they service and their use of leverage before you commit. Pro tip: If you want even more control over your investments, you might also want to look for a hard money lender that allows you to choose the local real estate markets you’re investing in.
Even when borrowers default, the primary investment can often be partially or fully recovered. Because the loans are backed by equity, if the borrower is unable to make payments, the lender is able to foreclose on the property to recoup the loan and recover the investor’s principal. Also, because private capital lenders only loan a certain percentage based on the value of the property, there is additional loss protection if the property loses value. Diversification also helps reduce risk because your investment is spread across multiple loans, geographies, asset classes, and borrowers.
If you’re interested in mortgage funds, Socotra Capital makes investing in hard money loans accessible and allows you to increase your fixed income yields without taking an outsized risk. Our rigorous underwriting process and low loan-to-value ratios protect your investment and give you the benefit of reliable monthly income. If you’re ready to learn more, the first step is to get access to our Investor Portal.
Investing in mortgage funds is just one way to make money with minimal effort. Check out our free guide How to Grow a Passive Income Portfolio in Today’s Market for more ideas.