What exactly are private mortgages? Why would I choose to invest in them?
A private mortgage is a secured debt obligation, which produces a regular, predictable income stream to the investor with all the security, protections and recourse that a mortgage lien can provide. While mortgages do not typically provide any capital appreciation, they do generate a steady stream of interest payments, which, in today's market, can exceed current money market rates by more than 10%. Unlike stocks, the security is tangible bricks and mortar, where legal protections such as title insurance and many other unique rights and remedies ensure the enforceability of a mortgage lien. Many private mortgage loans are also secured by personal guarantees from the Borrowers, adding another layer of recourse beneficial to the investor.
What kind of returns do private mortgages produce? Is the interest rate fixed?
The typical interest rate for a direct private mortgage range from 6% - 15%, or more, depending upon the time frame, the purpose, the loan-to-value ratio, the exit strategy, the quality of the Borrower's personal guarantee(s), the state where located, and other factors.
The interest rate can be either fixed or floating, depending upon the way the transaction has been structured. Typically the floating rate mortgages always set the initial interest rate as the "floor" so that it can go up if, for example, the Prime rate rises, but cannot go down if the Prime rate drops.
Do private mortgage investments belong in my portfolio?
Not many investments can dependably generate such strong returns, and few other investments have an asset like real estate as a backstop providing a very well protected downside. The key, as in any investment strategy, is to find a good Manager. Consistent success over an extended period of time is, of course, no guarantee of future performance, but it certainly would give some indication of what you can expect. Whether private mortgage investments are right for you will depend upon your time frame, your risk/reward expectations and your anticipated need for liquidity. Furthermore, private mortgages have stable returns and fit well within a portfolio of stocks, bonds and real estate. Adding these to a portfolio may make the returns of the total portfolio more consistent. When evaluating any potential investment, the advice of a professional investment advisor is helpful in assessing the role of private mortgages in an otherwise liquid investment portfolio.
Why would a Borrower seek a comparatively expensive private mortgage rather than a conventional bank mortgage?
The answer is frequently time-based. There are many reasons, but for starters, here are two:
1. Time Crunch: The Borrower has applied for a conventional bank mortgage, but the time-of-the-essence closing date is rapidly approaching, the bank is still completing it's due diligence, yet the Buyer/Borrower simply has to close in a timely fashion in order to avoid losing a hefty contract deposit. After closing the bridge loan with a Private Lender, the Borrower can then take as long as necessary to arrange permanent financing.
2. Transitional Property: Another typical case would involve a Borrower purchasing a vacant property that he plans to convert to another use (office to residential, for example). A bank would rather finance the deal AFTER the Borrower has executed his or her business plan, rented the property and created cash flow. The Private Lender is willing to get more deeply involved than most banks, evaluating the Borrower's past track record, the viability of the Borrower's current business plan to convert/improve the property, as well as the value of the Borrower's personal guarantee or other collateral. The savvy Borrower is also fully aware that he is only going to have the Private Loan outstanding for perhaps 12 months, and that paying 12% - 15% for such a brief period of time is far LESS expensive than bringing in much more expensive equity partners for the long haul. If an owner or developer raises additional equity by bringing in partners, it is certain that he will have to give up a substantial "piece of the pie."
Can I invest with my IRA or 401K?
Yes. There are many IRA and 401K custodians across the US that handle self-directed IRA's and 401K's and are familiar with private mortgages as an investment. You can utilize all forms of retirement plans including Keogh's, Profit Sharing Plans, etc. We accept IRA, 401K, and other tax-protected investments through third-party custodians. Tax-deferred investors (IRA's, 401K's, Pension Plans, Keogh's and the like) should speak with their financial advisor about any possible impact of UBTI (Unrelated Business Taxable Income). If you need more information about how to roll-over your current IRA or 401K to a self-directed IRA or self-directed 401K please contact us and we can refer you to such a custodian company.
How often will I receive interest payments?
Typically, private mortgages are paid monthly, however, it will depend on the note purchased. Private mortgage funds are typically invested for longer periods of time.
Can I choose to reinvest the interest distributions that I receive?
Yes. You can choose to either receive regular interest distributions or alternatively you can reinvest the interest that you receive. Most people utilizing retirement plans (IRA's, 401K's, Keogh's, etc.) tend to choose to reinvest.
What are the different ways that I can participate in private mortgage investments, and what are the advantages/disadvantages of each?
There are two different approaches to participating in a private mortgage investment:
1. You can determine a viable single note and mortgage through our resources, which will include a finder's fee. Once you close you may either accept responsibility for servicing your own note, or retain our services to a) conduct the necessary due diligence, b) structure the terms and conditions of the note purchase, c) our real estate attorney will draft the documents and represent your interests, and then after the loan closing, d) we service the loan.
2. Alternatively, you may choose to participate in a fund that is already staffed to do all the above by experienced professionals, and benefit from the diversification that results from being invested in a carefully chosen pool of private mortgages
rather than in one or two individual private mortgages.
How safe are private mortgage investments? What are the risks?
There are inherent protections unique to private mortgage loans which can significantly limit any downside risk when carefully implemented in the transaction's structure and in the private mortgage documents. The biggest possible risk, of course, is that for one reason or another the Borrower stops paying the private mortgage and at the same time the value of the collateral diminishes. To offset this risk factor, in some cases there will also be one or more personal guarantees. In situations, for example, where a property is being rehabilitated, an interest reserve may be established to fund the interest payments during the time that the property is being renovated and not producing any cash flow. The key is evaluating the private mortgages and the Borrowers very carefully and then anticipating (and incorporating into the note purchase agreements and other documents) ways to offset the risk of a non-performing loan. Keep in mind that the private mortgage documents assess late fees and default rates of interest that serve as powerful disincentives for Borrowers to make any late payments or to default on their loan obligations. If, however, the transaction has been structured properly, there will be plenty of equity in the property to protect the Lender. As in any investment opportunity, the quality of the management is of key importance. You want seasoned professionals in charge who have many years of experience successfully originating and managing a portfolio of private mortgages.
What about diversification? Is it possible to achieve diversification in this type of investment?
Diversification is one of the primary advantages of investing within a private mortgage Fund format. A Fund's goal is to have a widely diversified portfolio of private mortgage investments in order to reduce risk as well as to achieve continuity of cash flow (in other words, even if one mortgage is repaid, there are still many other private mortgages paying the desired rate of return, resulting in continuous cash flow).
What is the minimum investment that I can make?
$50,000 is our minimum. This can be divided between regular and tax-deferred accounts.
Can I add to my investment later on if I so choose?
Yes, we permit current investors to add to their investment.
How liquid is my investment? What time commitment do I have to make?
Since most of our bridge loans have terms of 1 year ranging up to 5 years, and our individual private mortgages usually have balloons at 5 years, only investors comfortable with a 5-year time horizon should consider investing in private mortgages within an individual or Fund format.
Who can participate in private mortgage investments?
Please go to our Accredited Investor Form and complete it for more information. If you are not an accredited investor, or chose to only invest in individual private mortgages, again, fill out the Accredited Investor Form which provides for this identification so we may contact to start our conversation.
In most cases, only accredited investors may invest in a private investment fund after carefully reviewing the Offering Memorandum. Please go to our Accredited Investor form and complete it for more information. Accredited investors who so request will be contacted and then may review any current Offering Memorandum and LLC Agreement.
How can I learn more about whether private mortgage investments are right for me?
You can reach us at 800-903-5991. In addition you might wish to speak with other investors with experience in this type of investment, Fund Managers or others who source, originate and service these types of loans.