If you’ve got extra capital in an account that’s not making money but don’t want to put it in the stock market, it might be time to learn about mortgage fund investing. Mortgage fund investing can produce steady income —provided certain risks are adequately managed.
Mortgage fund investing is allocating capital to a group of hard money loans all at once instead of doing one loan at a time on your own. One of the benefits of mortgage fund investing compared to individual notes is that your investment is diversified across multiple loans. Additionally, most mortgage funds will have some degree of liquidity so you can exit the fund more quickly than an individual loan.
With mortgage fund investing, your investment goes into a larger pool with contributions from other investors. This pool of money is used to fund multiple mortgages. Depending on how the fund is managed, these might include real estate loan types such as bridge loans, fix and flips, cash-out refinancing, and more.
The investment is committed for a fixed period of time, also called the “lockup period,” and during that time, returns are distributed on a predetermined schedule, usually monthly or quarterly. The risk is spread over the entire portfolio of mortgages, and all investors share the risk equally. If a borrower does default, the mortgage fund has the option to foreclose in order to recoup some or all of the principal, which is one of the ways to reduce risks for this type of investing.
When investors exit the fund, their capital is returned to them, and the mortgage fund continues on with the existing group or can add new partners.
With mortgage fund investing, the fund manager decides which loans get approved and how the loan is structured, so it’s important to choose a manager whose judgement you trust.. Here are a some questions to test when considering an investment in a mortgage fund:
Portfolio management is probably one of the most important elements to evaluate when examining a mortgage fund. What types of loan-to-value ratios does the fund have? What types of properties will it entertain? Does it tolerate consumer loans or loans in both judicial and non-judicial foreclosure states?
How long has the mortgage fund been in existence and what have the historical results looked like? Established managers who have survived multiple market cycles are likely to continue on, provided they adhere to sound underwriting standards.
Look for a manager that services multiple types of real estate loans, including bridge loans, fix and flips, residential rehab, commercial properties, and more. Geographic diversification also ensures that loans are not concentrated in any one area. When it comes to borrowers, if a manager offers loans for multiple properties, make sure they put a cap on how much debt any individual borrower can carry at one time. All of these measures help fund managers maintain a diversified portfolio that mitigates risk for investors.
Look for a fund manager that does not leverage the fund and maintains no debt. This means that your capital is not at risk of being wiped out by another lender.
Since the Socotra Capital fund was founded in 2007, we have built a strong track record of success with more than 1,000 loans and $500 million invested. If you’d like more information about investing in mortgage funds, get access to our Investor Portal today.