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Title: Private Mortgage Loans as an Alternative Asset: Fixed Income and Principal Preservation

Keyword:  private mortgage loans

Meta Description:   Private mortgage loans can be a simple investment with relatively low risk compared to others. Learn more in this article from Island View Private Loan Fund.

 

 

 

When most people hear the word mortgage, they think of a 30 year commitment, a low fixed interest rate, or maybe the promise of a home that is secured as collateral for repaying the loan.  Historically speaking, though, this modern day concept of a mortgage loan is a relatively new idea that dates back only to the 1930s.

Originally, the idea of a mortgage was forged not by banks, but by insurance companies who provided the loan. Unlike todayís banks, the loans werenít made in order to collect interest on money. The insurance companies actually made mortgage loans not with the idea that borrowers would pay them off, but in the hopes the loan would default so they could then own the real estate outright at a reduced price. Of course, this would be deemed an abusive practice for a modern residential home mortgage.

Elements of this scenario, though, present real estate investment loans in similar terms of a personal property loan with collateral to secure the debt. Letís face it, most people nowadays looking at private mortgage loans as an investment donít have intentions of becoming landlords. And most donít want to stay invested in a specific asset for 30 years, especially if retirement is looming in less than a decade.

Luckily, private mortgage loans have evolved since the 1930s and now can be a superior investment over a bond fund or other traditional fixed-income investment. The mortgage terms can last 1, 5, 10 or 15 years. The returns are easier to manage than owning something like an apartment complex outright. If thereís more than enough equity to safeguard and preserve the principal loan balance and whatever interest amount you offer, then it should be an easy decision to invest in private mortgage loans.

Here are a few items to keep in mind when considering investing in private mortgage loans:

Loan Repayment. In this day when banks arenít lending to even well qualified buyers, knowing how your principal investment will be returned is crucial. The borrower can make payments on the loan for the full term and repay all your money, plus the entire projected interest profit. The borrower could also refinance to a more traditional mortgage or sell the property, paying back your loan and some interest.

Repayment Ability. While the equity of the real estate is important when discussing private mortgage loans, the repayment ability of the borrower is also crucial. Address the issue of repayment ability before making the investment, as you want to be sure about the likelihood of receiving regularly scheduled payments versus experiencing a default on the loan. If, for example, the property offers a rental income that more than covers the mortgage payment and monthly property expenses, then thereís a higher likelihood of repayment in full.

Collateral. Unlike many other investments, real estate lending is a more secure method for procuring a return because there is a tangible asset involved. The private loan is made by a borrower against a commercial property, residential rental property or other income generating property. If the borrower defaults, you acquire the property, which can then be resold to recoup your principal.

Discount Real Estate. Private mortgage loans are often made for 60 to 70 percent of the propertyís value. If the borrower slips into default, you acquire the property via foreclosure for the amount of the loan, minus whatever they happened to have given you before they stopped paying. Depending upon the property, and your interest, you may be able to rent it out and gain a greater return than what you were making on passive mortgage interest income, for years into the future. Of course, you could recoup your principal investment and a tidy profit should you simply resell the property.

Though real estate lending isnít a complicated science, it does have its nuances. They can be risky if youíre not aware of how to fully protect your assets. First timers should rely on an experienced advisor for help with reviewing and analyzing these types of alternative investments.

Financial markets can be complicated and overly interdependent, often obscuring the potential risk of loss. Private mortgage loans can be a simple investment with relatively low risk compared to others. When facilitated in a comprehensive and cautious manner, private loans are a great source of passive income with the ability to preserve your principal investment even in the event of a loan default.

Learn more about private lending and private loan scenarios with Island View Private Loan Fund.

Title:  Private Mortgage Loans for Attractive Investment Yields

Keyword:  private mortgage loans, private lending

Meta Description:  For good yields, investing in private mortgage loans backed by real estate could be a smart choice. Learn more in this article from Island View Private Loan Fund.

 

 

Itís traditionally believed that achieving higher returns on investments means taking on more risk. But thatís not necessarily the case. For attractive yields with a self-directed retirement account, investing in private mortgage loans backed by real estate could be a smart choice.

One of todayís most straightforward alternative investments is funding a private mortgage loan. 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. Some examples of what types of properties that can serve as collateral are income producing commercial properties, multi-family homes, new construction developments and renovation projects.

There are many opportunities present in todayís private lending market.  Loans typically are approved at no more than 60 to 70 percent of the market value of the commercial or residential property. Loans made to real estate owners are typically one, five and ten 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 investment advantages that private mortgage loans have to offer include:


ē Less Volatility. Unlike typical investments like stocks or bonds, there are no real-time dynamic financial forces affecting the yield on a private mortgage loan.

ē Security. They are backed by a hard asset such as real estate, minimizing risk if the borrower defaults on the loan

ē Short Term. They carry shorter terms on the investment notes, which is perfect for people approaching retirement.

 

While private loans provide a higher rate of return than traditional investing, there are also some risks associated with them. The main risks can be avoided by properly vetting the investment by following these tips:

 

ē Consider the market for the property. Choose properties with resale value for the greatest pool of potential buyers. For example, properties that have very high values relative to the rest of the market have a smaller pool of potential buyers willing to purchase the property for the appraised price. In the case of default, you donít want to end up with a property you canít sell.

 

ē Have a current appraisal report of the property. The goal of the private mortgage investor should be to confirm they have more than enough equity to justify the loan. An appraisal can go a long way towards that end.

 

ē Complete a recent title search. Know that the property has a clean title before investing.

 

ē Verify the lien position. Being in the first position on the title decreases collection risks should the borrower default.

 

ē Require homeowners insurance for the property. Weather events, fire, or vandalism are risks to the property (and your investment) that can be mitigated by requiring proper insurance.


ē Have an attorney review the documents. Having an experienced attorney review the loan closing documents and agreements will prevent exposure to otherwise avoidable risks.

 

For interested investors, often the main reason for not pursuing this type of alternative investments is experience. Underwriting or assessing the risk associated with a private mortgage loan is a bit different from other investments. Without firsthand knowledge of how to underwrite this type of alternative investment, many investors learn by trial and error with sometimes undesirable results.

 

One of the most prudent things you can do to reduce the risks related with private mortgage loan investing is to choose an expert service provider that can assist you in evaluating these opportunities. Proven and trusted professionals with an established network of resources are the best to help guide through the necessary steps to a successful investment.

Learn more about private lending and private loan scenarios with Island View Private Loan Fund.

Title: Private Mortgage Loans Protect Principal While Obtaining Good Returns

Keyword: private mortgage loans, private lending

Meta Description: Discover the reasons why a private mortgage loan is superior to a bond fund or other traditional fixed-income investment in this post from Island View Private Loan Fund.

 

Have you ever heard someone say something to the tune of ďIíve worked too hard building up my savings to lose even a little of it in this market, but I donít know what I should invest in?Ē Sensible and cautious investors protect their principal by looking for low-risk investments with promise for worthwhile returns. This is the outlook of many investors these days, especially those with less than 10 years left before retirement.

 

Even so, people who arenít close to retirement are looking for safety, too. With a more than 30 percent loss in values on the stock market during the past few years, keeping an investment straightforward and limiting exposure risk is a bigger priority than ever. This is why many have left Wall Street and are making use of self-directed retirement accounts to invest in private mortgage loans.

 

The difficulty with most traditional Wall Street investments is that dollars are allocated to various investments, like companies and mutual funds. In these scenarios, there is no limit to how much principal one individual could loose on any certain investment. Thatís a risk most retirement-minded people canít afford.

 

Some investments are guaranteed by insurance companies or even the U.S. government via a mortgage backed security from Fannie Mae or Freddie Mac. However, even in a situation where the investment income stream is guaranteed in this way, it is always based on the credit risk and means of the entity guaranteeing the loan, not directly secured by a tangible asset.

 

With this in mind, there are several reasons why a private mortgage loan is superior to a bond fund or other traditional fixed-income investment.

 

Less Volatility. Unlike typical investments like stocks or bonds, there are no real-time dynamic financial forces affecting the yield on a private mortgage loan. Either the installments and interest are paid by the borrower as agreed, or if a default occurs, there is generally more than enough value in the asset to recover the principal invested, as well as a margin of profit.

 

Asset Specificity. When you purchase shares in a mutual fund, your money is pooled with thousands of other investors and is then spread out into dozens of different companies. If there is a robust demand by investors for liquidity in the same investment, its value can fall drastically. By investing in private loans, the debt is secured to a specific asset, such as a commercial building or other investment property. While private mortgage loans are less liquid than other investments, you have greater control to protect the original principal invested.

 

Income Generation. Most traditional investments are primarily valued in relation to their liquidity, ability to provide an income stream, and for potential equity appreciation. With private lending for real estate, the amount of rent and expense of the property (asset) is known and taken into account with the loan underwriting. With the income from the property determined, it should easy to determine if it will make enough to cover the loan payment and expense for the property, as well as profitable interest.

 

Cushion of Equity Value. Unlike paying the value for a stock, bond or other investment, a private mortgage loan typically is not made above 65% of the propertyís value. In the event of a default, the assetís discounted value becomes the investment basis by the investor who made the private mortgage loan. This allows the private mortgage loan investor to acquire the asset at a fraction of its market value. The excess equity in the property could be realized as a gain through a resale of the property.                 

 

Shorter Term. Traditional mortgage backed securities offered by Fannie Mae and Freddie Mac offer low interest rates for up to thirty year notes at 2.50 to 3.50 percent. When youíre ten years from retirement, this doesnít offer the security you need. In contrast, private mortgage loans are less than ten years in duration and carry a rate of interest in the mid- to high-single-digit range. Because there is no readily-available secondary market for private mortgage loans, investors should plan to hold the private mortgage loan without the need to liquidate the investment before the expected maturity date.

 

In many ways, a private mortgage loan is an exceptional investment compared to more traditional fixed-income investments. This is particularly true when it comes to people who may be nearing retirement. The greater control, less volatility, value cushion and short-term nature of private mortgage loans make them worth of consideration.

 

Learn more about private lending and private loan scenarios with Island View Private Loan Fund.

 

About the author:  Josh Manier is Managing Partner of Island View Private Loan Fund, LP which provides due diligence, loan underwriting, and loan servicing for private investors seeking to place private mortgage on real estate. The fund specializes in providing non-recourse financing to self-directed IRA holders looking to renovate, build new construction, or who need assistance structuring owner financing for their investment real estate transactions. He can be reached at 952-345-3445 or via email at josh.manier@ivplfund.com  Additional information can be found at www.ivplfund.com