In many ways, a mortgage fund seems like the more logical choice in terms of investment; they dilute your risk, and offer a more flexible redemption. The rate of return is similar, but the flexibility makes them the right choice for most clients looking to get into the mortgage backed security market. So why would some investors choose to go with a private mortgage placement for their capital instead?
A mortgage fund, is a pool of investors who are all involved in the lending of mortgage dollars. No one client will be overly exposed in a situation where one property fell into a foreclosure situation or saw some traumatic event. Funds can be taken out of the fund, with no consequence to individual properties on the fund.
Private placement on the other hand, is one investor funding a mortgage on a specific property for a client. All the risk/return is realized by the one (or more) investor. The funds are tied up as long as the mortgage is active.
For some investors who are not concerned with the ability to liquidate their funds, a private placement may make more sense. Mortgage funds have to carry a certain amount of reserve, for clients to be able to cash out their investment. This reserve is usually in the 10% range, which means 10% of your dollars are not working for you. This reduces the amount of return you achieve on your overall investment.
With private placement, all of your funds are working for you, there is no need for a reserve. For investors who do not need access to these funds, the private placement makes sense if you don’t mind the extra risk of being the only investor on the deal.
In either of these options, the exposure is very low (with us in the Caribbean, not in other locations where loan to values are much higher), making the investments fairly low risk. This 10% reserve does bring down the overall ROI of the fund however, not so much that it should be a deterrent when you factor in the benefits of a fund.
Every client is different however, and we are happy to discuss your situation to see which one makes the most sense for you. We will structure an investment strategy that will get your money working for you today and tomorrow.