Private Mortgage Loans as an Alternative Investment
Achieving higher returns means taking on more risk, right? Not necessarily.
If you want attractive yields utilizing a self-directed retirement account, but have little time to find alternative investments, then investing in loans backed by real estate could be a reasonable choice.
One of the simplest and most straight forward alternative investments that exists today is funding a private mortgage loan. Loans typically are made at no more than 60%-70% of the market value of the property, so risk is extremely low.
For interested investors, often the main reason for not pursuing this type of alternative investments is the experience of underwriting or assessing the risk associated with a private mortgage loan. Without firsthand knowledge of how to underwrite this type of alternative investment, most investors are left to rely on trusted professionals to guide them through the necessary steps, or learning by trial and error.
Loans made to real estate owners are typically 1 to 5 year terms, allowing the borrower an opportunity to increase the income generated from the property and then qualify for a lower cost traditional mortgage.
Some of the advantages of private mortgage loans are:
While private real estate loans provide a higher rate of return than traditional investing, there are also some risks associated with them. They may include:
Not properly vetting the investment such as:
Choosing properties that have a limited resale market. By lending against properties that have very high values relative to the rest of the market, the pool of potential buyers is often smaller. For example, if you provided a $400,000 loan on a $1 Million dollar investment property unless the property is located in an area where a high resale price is common you may not be able to sell the property very quickly for the appraised price.
There are many private loan opportunities that are present in todays lending market. An ever increasing number of real estate investors and business owners need access to capital but are unable to obtain funding through conventional banks for a variety of reasons. Below are some examples properties types that can serve as collateral:
One of the most prudent things you can do to reduce risks related to private mortgage investing is to choose an expert service provider that can assist you in evaluating these opportunities preferably one with an established network of resources to assist you.
Because this investment vehicle is new to many investors, I'm often asked about what potential returns are. The following is an example of what a private mortage investment might look like:
Financial results of the investment:
So as you explore this emerging alternative asset class of private mortgage loans, keep in mind these three things: (i) make sure to obtain and verify all the facts on the property or asset you are lending against, and/or information regarding the company managing these investments on your behalf (ii) understand your exit strategy, and (iii) confirm the loan-to-collateral value falls within what you deem as a reasonable risk threshold. Lastly, once completed, enjoy collecting passive income though this unique alternative investment.