Alternative investments are gaining popularity as more investors learn about the unique benefits.
One lucrative alternative investment is private mortgage funds, which have the potential to earn investors higher yields, balance portfolio risks, and even provide tax benefits.
But is this type of investment secure? And how do you know if you are partnering with a reputable funding group?
In this article, we’ll cover everything you need to know about private mortgage funds, including the security, risks, benefits, and how to invest in one.
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What is a private mortgage fund?
In today’s market, borrowers are increasingly seeking a more flexible source of financing for their real estate needs.
Traditional lending institutions such as banks have to follow strict requirements that can block borrowers and investors from achieving their goals.
With this growing need comes opportunities for investors to finance private debt.
How private mortgage funds work
Private mortgage funds pool capital from multiple investors to finance real estate loans.
The funds, managed by professionals, are generally structured to invest in various types of mortgage-backed securities (MBS) or direct loans secured by real estate.
How private mortgage funds are structured
Let’s break down the roles involved in private mortgage funds.
- Fund manager: As the fund manager, organizations such as Marquee Funding Group raise capital and source loans in addition to managing all loan servicing, processing, and escrow in-house
- Investors: Provide the capital for the fund and, in return, receive distributions primarily in the form of interest payments from the underlying loans
- Loan portfolio: Contains a range of real estate-secured loans that are typically diversified across different property types, geographic locations, and loan maturities to mitigate risk
Private mortgage fund objectives
Private mortgage funds serve multiple purposes for multiple parties, including:
- Generating income for investors
- Financing real estate projects
- Preserving investor capital
- Diversifying investment portfolios
- Providing liquidity to borrowers who don’t qualify for traditional loans
- Supporting economic development
As a result, accredited investors can participate in something much greater than themselves—while earning significant income over time through monthly interest payments.
What makes private mortgage funds secure?
Not all private mortgage funds are secure because they are not all created equally.
Superior funds rely on the managers’ approach to protecting investors.
1. Prudent underwriting practices
Experienced private lenders like Marquee Funding Group know exactly what they want in a real estate deal.
Prudent underwriting involves:
- Thoroughly evaluating the borrower’s financials and ability to repay the loan
- Looking beyond basic metrics for the borrower’s full story and true valuations of the property through comps and an appraisal.
- Making sure the terms and conditions align with the fund’s risk tolerance and investment strategy
- Weighing the potential risks associated with the loan
- Confirming the quality of collateral and verifying titles
- Emphasizing principal and yield preservation
Conducting rigorous due diligence according to the fund’s standards helps managers ensure that only the highest-quality deals are included in the portfolio.
2. Diversification of assets
Diversification involves investing in various mortgage products, property types, geographic locations, and maturities.
This spreads risk across different real estate market segments, reducing exposure to any single type of mortgage.
Including loans with varying maturities helps manage liquidity and interest rate risks.
3. Professional management
Experienced fund managers have a deep knowledge of real estate and mortgage markets.
This background allows them to make informed investment decisions that benefit the fund rapidly.
They also have robust risk management strategies that help make the fund as strong as possible under various conditions.
Marquee Funding Group has the following experience:
- 30+ years of experience in private mortgage
- 2,300+ loans closed
- 20+ member dedicated in-house team and CPA
- $3 billion+ aggregate loan volume
Investing with Marquee Funding Group
Start investing in private real estate debt with a private mortgage real estate investment trust (mREIT) through Marquee Capital Fund 1.
The Fund allows you to passively invest in high-yielding secured notes through a range of underwritten mortgage products—with a preferred return of 8%.
How private mortgage funds differ from other types of investments
- Directly investing in real estate: Involves purchasing and managing individual properties—which is a much more active investment than private mortgage funds
- Equity REITs: Involves investing in physical properties and generating income primarily through leasing and property management, while private mortgage funds invest in real estate debt
Because private REITs aren’t listed on a major exchange and aren’t subject to most SEC regulations, their compliance costs are lower and yield higher dividends.
How to mitigate potential risks with private mortgage funds
If the fund managers are in charge of limiting investor exposure, what role can investors play in reducing potential risks with private mortgage funds?
Consider these key strategies for mitigating risks with your investment:
- Research the fund and management team to make sure experienced professionals manage it with a proven track record
- Diversify your investments across multiple funds and other asset classes
- Make sure you understand the fund’s investment strategy and how it aligns with your financial goals and risk tolerance
- Regularly review the fund’s performance to compare it with your expectations
- Consult with financial and tax advisors to make sure you are maximizing your investments
Remember that not all funds are created equally. Connect with the fund’s team to ensure you can communicate openly and build a successful partnership.
Benefits of investing in a private mortgage fund
You now understand what factors contribute to securing private mortgage funds, but is this type of fund right for your financial and investment goals?
To summarize, the key benefits of investing in a private mortgage fund include:
- Earn passive, high-yielding fixed income
- Better returns than stocks
- Potential for capital appreciation
- Benefits of real estate investing without the hassle of owning and managing properties
Marquee Capital Fund 1: Outperforming the market
The Marquee team treats our investors and clients like family and believes in building deep-rooted connections that last a lifetime.
This level of care and services makes investing with us a truly unique opportunity.
Start investing with Marquee Funding Group today!