Posted by: Daryl & Wendy Ashby | February 16, 2010

Investing in Mortgages

Investing in mortgages is certainly not new, but few investors actually know about this.

The rate of return is generally much higher than mutual funds, but there are also elements of risk that need to be considered. Rates of return can vary from 7 percent to 25 percent and there are three common ways to invest.

MICs: Mortgage Investment Corporations, is a pool of investors that use their money to loan against property. The return is based on the overall performance of the fund. They are highly regulated as to the types of properties that can be loaned on, and there are numerous reporting requirements. The majority of these funds are highly successful and well managed, but not all funds are created equal. If there are defaults or foreclosures, the losses are spread throughout the investors in the pool thereby reducing the risk to any one investor.

Syndication: Syndicated mortgage lending is typically used for high-net-worth individuals or firms that qualify as accredited investors. Generally there is a minimum amount to be invested ($150,000), and the investor is an owner of the loan by percentage of amount invested.

The legal framework can take on various forms, and investors are advised to seek legal counsel on the documents. Syndicated loans attract experienced investors who are looking for a higher rate of return.

As expected the risk is higher as a delinquent loan means the investor doesn’t get his monthly payment. In the event of a default, the investors could lose all or part of the capital invested.

Experienced private mortgage firms usually put syndicated loans together. These firms act as a trustee for the syndicate by completing the due diligence on the loan and collecting and disbursing payments.

Direct Lending: This is where the investor loans directly to a borrower. This represents the highest risk if the lender doesn’t understand how to analyze a mortgage deal, because the lender has to do his or her own due diligence.


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