What is a mortgage investment fund? Private mortgage investment funds offer investors an alternative asset investment choice when diversifying their portfolio while offering income producing instruments. This type of alternative investment also gives investors a way to invest in a more passive method than a direct purchase of commercial real estate. This blog will be directed to help investors understand how these funds function and their advantages and disadvantages.

Investment Strategies

Investors who want to diversify their portfolio with multiple assets classes often turn to real estate as many investors consider it a better-performing asset than stocks, bonds, or commodities. Private mortgage funds make an attractive alternative type of real estate investment for the following reasons:

1. It is an alternative to direct ownership of real property. Direct ownership of real property requires intensive investor management and increases risks (but also increases rewards) of significant upward (or downward) valuation of the real property directly owned.
2. Investment in mortgages, which are funded at a conservative loan to appraised value of the real property, help protect the investor from fluctuations in real estate property values.

Being a private mortgage fund investor Investing in a “fund” creates several advantages:  (1) the management of the loans are handled by professional real estate lenders with experience in this field; (2) investment in a “fund” allows diversification of capital among a number of loans so that any problems with one loan are less serious that owning all or a large part of just one mortgage investment.

Yields from Private Mortgage Funds

The yields received by investors from private mortgage funds are typically based upon the terms of the loans in their portfolio. This is mostly influenced by the origination fees and interest rates that they charge.   Private mortgage funds typically are focused on funding loans to commercial real estate borrowers that are not able to find “traditional” bank or life insurance company funding for various reasons.  These borrowers frequently have very good properties but just fall outside the “box” that banks and life companies create.  This type of private mortgage fund, sometimes called a “hard money fund” protects its investors by limited lending to a conservative ratio between the amount of loan principal and the appraised value of the property.  Normally these lenders do not exceed 65% of this ratio of principal to appraised value. If the property is appraised at $1,000,000 then the first mortgage secured loan would not exceed $650,000.  This provides a significant “cushion” in the event of any issues arising with the loan.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.