One solution for the riskaverse |
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investor is to look to |
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shortterm mortgage |
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investments ( no more than 5 |
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year maturities ) for relatively |
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high current monthly income |
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( approximately 8 % as of this |
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writing ). The shorter |
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maturities guarantee the |
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investor will not get caught |
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RISK VS REWARD FOR MORTGAGE INVESTMENTS Should You Add Mortgage Investments to Your Portfolio ? |
holding lowinterest investments if interest rates rise as the mortgages mature and new ones replace the old ones at whatever the then prevailing rates . In addition , if loans are 65 % LTV or less , then the value of the underlying property could decline by onethird and the investor ’ s mortgage is still covered . The investor needs to examine the underlying real estate and ask himself if he would be willing to own it for the mortgage he is considering . For example , if the property appraised for $ 100,000 , would the investor be willing to own it for $ 65,000 ( his investment in the mortgage )? The Great Recession saw real estate values decline ; however , they generally did not crash but had a prolonged [ 3 + years ] decrease . Thus , for those |
holding short term mortgages , they still had enough equity in their investment and the borrowers either sold or refinanced the mortgage before it declined too much .
Where do investors ( and their advisors ) find these shortterm real estate mortgages ? There are lenders called “ private money real estate lenders ” who provide private financing to borrowers who may not be able to obtain conventional loans for a variety of reasons . Advisors should primarily deal with lenders who have a good reputation and record the deed of trust . In some cases , investors may want to invest in a specific mortgage because they know exactly which property is securing their investment ; however ,
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the down side to this strategy is that there is now a lot of competition for these types of loan investments and one may be sitting on the sidelines waiting for an opportunity to invest . If the investor ’ s money sits too long [ in a low interest , liquid account waiting to deploy funds for a new loan ], the blended rate of return after the loan is found and invested in may be lower than if the investor invested in a Fund that holds mortgages . For example , if an investor allows his / her money to rest in a money market fund paying 1 % and it takes six months to find an 8 % note , after one year , the average rate of return for that year was only 4.5 % as compared to a Fund that may pay 7 %. Something else to consider is that a Fund may allow for a reinvestment of monthly distributions thereby |