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 |