Private Mortgage Funds: Pros and Cons

• August 8, 2017

Private mortgage funds have provided an alternative investment option for many individuals across the globe. It should be noted that long-term bond funds come with significant risks, should interest rates move upwards. Short term bonds on other hand cancel such risks, but with the disadvantage of having low returns.

With private mortgage funds, investors can expect to get yields that are equal to, or which exceed those of long-term bond funds. However, such investors must reduce their risk by using a conservative loan principal amount to the tune of the valued real estate property. Such loans are normally secured by the first mortgage. Most private mortgage loans are secured for a duration of up to three years, and this greatly reduces the risks associated with getting loans that come with long maturities, which will also be subject to lots of interest fluctuations, thus affecting the resale value of the loan.

The major caveat regarding investing in private mortgage loans, is the fact that you are likely to lose principal, should you default in repayment. However, this risk can be reduced based on the underwriting practice used by the private lender. Sometimes private lenders will restrict private mortgages to amounts less than 65% of the value of the property. It is thus very vital to consider the management team’s experience every time you are considering private mortgage funds.

You will have greater chances of getting good returns with the funds, if you are lucky enough to work with a scrupulous management team, which will have the ability to avoid underwriting loans with greater risks. Investment in private mortgage funds will become very risky if poor underwriting and risk assessment was done. This will not just lead to high default rates, but also might cause you to lose the principal investment.