Have you thought about getting into real estate investment, but don’t know the first place to start? Do you want to reap the benefits of a booming market but don’t know the first thing about managing an investment property? Then a mortgage fund may be right for you.
A mortgage fund is where mortgage and investment meet. Mortgage funds are a way to invest in real estate without actually owning any property. With a mortgage fund, a collection of private investors pool their money together to provide a private loan. For many investors, mortgage funds are a great way to see a return on investment without having to lift a finger. Here’s how mortgage funds work.
How does a Mortgage Fund Work?
Not every mortgage fund is created equally. However, the basic structure of a mortgage fund is the same across different services and firms. Here’s how most mortgage funds work:
- Multiple Investors Pool Funds – Investors pool money into one large fund that is often managed by a professional firm. The fund manager handles the general operations of the fund including borrowers and the distribution of capital.
- Borrowers Take out Loans from the Mortgage Fund – The fund manager will find potential borrowers who are looking for a mortgage loan. These borrowers are put through a screening process to ensure that they are capable of repaying their loans. These potential borrowers are often people who are not eligible for traditional mortgages from established borrowers or banks.
- Borrowers Pay Their Loan with Monthly Payments – The fund manager collects monthly payments, including interest, from borrowers as they pay off their loans. The money collected from the loan repayments get added back to the fund. The principal of the loan payments is reinvested into the fund to be borrowed again.
- Investors Receive Payouts from the Fund – The money collected from borrower’s interest payments are redistributed to investors. As more mortgages are lent to borrowers, the potential for ROI only increases. On average, investors can expect around a 10% return on their initial investment.
Pros and Cons of Investing in a Mortgage Fund
Mortgage funds can provide a great opportunity for investors. However, just like any investment, they come with a set of pros and cons.
Pros
- Completely Passive – One of the major benefits of investing in a mortgage fund is that it is completely passive income. Unlike other forms of real estate investment, you don’t have to spend hours managing and repairing properties. Once you invest, you can make your money work for you without lifting a finger.
- Automatically Diversified – Mortgage funds have diversification automatically built in making your investment safer in the long run. Mortgage funds serve many mortgages at one time. This means that if one borrower defaults on their mortgage payments, your entire investment does not become worthless.
- Low-Risk Borrowers – Although many borrowers who utilize mortgage funds fail to meet the requirements of traditional bank loans, a mortgage fund manager has much more control over who is allowed to borrow. This increased control allows managers to choose low-risk borrowers that have a great track record. Handpicked borrowers can help secure your investment and ensure that you see profitable returns over time.
Cons
- Lack of Control – One of the major downsides of pooling your money into a mortgage fund is that you lose control of how your money is used. Mortgage funds are usually managed by a firm that decides who the money is borrowed to, giving you no control over your investment.
- Potential Fees – Most established mortgage funds come with a few fees that investors must pay to participate in the fund. New member fees and annual fees are common. These fees ensure that the fund manager is paid for their services.
- Potential Default Risk – The biggest risk of a mortgage fund is the threat of borrowers defaulting on their mortgage. When a borrower defaults, you will not receive any return. Fortunately, most mortgage funds service multiple loans at once. Fund managers perform plenty of screenings to make sure the fund is being utilized by borrowers with a great track record.
How to get started with a Mortgage Fund
Mortgage funds can be a lucrative and safe way to invest your money. Getting started can be easy. Here’s how:
1. Do Your Research
Much like any other investment, a mortgage fund investment requires you to do some research. Before you start comparing mortgage pool fund options, you need to know exactly how much capital you can invest. Different funds offer different fees depending on the size of your investment. Many funds also have minimum investment limits. Knowing the amount you are capable of investing will help you choose the mortgage fund that is right for you.
After you have settled on the amount of your investment, you should compare a short list of mortgage funds. Look at each fund’s fees. Evaluate the average return rates for each fund. Check the risk levels of their investments. Be sure that the diversification of their portfolios fits your investment goals.
2. Choose the Fund that Fits You Best
After you have created your shortlist and compared the options, you can choose the fund that makes the most sense for you. Consider the investment strategy of each fund and find the one that best aligns with your goals. Each mortgage fund comes with its own level of risk, so it is important to find a fund that matches your risk level. At the end of the day, trust will play a large role in your choice. Much like any other investment, choosing a mortgage fund manager that you trust will give you peace of mind that your investment is not being mismanaged.
3. Begin Building Your Wealth
Once you have chosen the mortgage fund that fits you best, it is time to begin your investment and start making passive income. Contact the fund manager and begin the mortgage fund investment process.
Conclusion
Investing in mortgage funds can be a great way to get involved with real estate without doing any of the hands-on work. Mortgage investments can provide a consistent return through a diversified and well-managed portfolio.
