What Is a Mortgage Fund?
A mortgage fund is a way to invest in real estate without buying or managing investment properties. Instead, mortgage funds pool money from investors to make private mortgage loans.
Here’s a look at what you need to know about investing in a mortgage fund before adding this type of investment to your portfolio.
How does a mortgage fund work?
While every mortgage fund is a bit different, the investing process usually follows the same four steps:
- Investors pool money together in a fund: Professional fund managers create the fund and oversee its day-to-day operations.
- The fund lends money to borrowers who need mortgages: The fund provides mortgage loans to interested borrowers, often those who are unable to meet the minimum requirements for traditional bank loans.
- The borrowers make monthly payments to the fund: The fund collects all payments from borrowers as they pay down their mortgage loans, similar to a traditional loan servicer.
- Interest payments and fees are distributed among the investors: The fund will typically collect the principal loan amount and reinvest it, but any interest payments are considered the investors’ return on investment (ROI).
Typically, an investor can expect to see a 7% to 10% return on mortgage fund investments, but it’s important to remember that the ROI can fluctuate depending on the quality of the investments made.
Want to better understand how mortgage payments break down? Read our guide on PITI payments.
What are the pros and cons of investing in a mortgage fund?
Pros
- Passive investment: You don’t have to do the hard work of choosing individual investments. The fund managers do that for you.
- Diversification: Since mortgage funds invest in multiple loans, you’ll automatically have a diversified portfolio.
- Borrower quality: Many fund managers have existing relationships with mortgage lenders, granting them access to better quality borrowers if you were to invest in a seller financing relationship on your own.
Cons
- Less control: Since mortgage fund managers choose investments for you, you won’t have control over which loans you fund.
- Fees: Most mortgage funds charge investors an annual management fee in exchange for doing all of the legwork to find and manage the fund’s investments. This fee can range between 0.25% and 0.50% of the total assets under the fund’s management.
- Risk of default: Mortgage funds often lend to borrowers who aren’t able to qualify for traditional mortgage programs. As a result, they often come with a higher default risk than other investment vehicles.
Want to explore other options? You could decide to invest in traditional mortgage-backed securities instead.
How to invest in a mortgage fund
- Assess your finances: As a rule of thumb, it’s always a good idea to take stock of your finances before taking on a new investment. If you work with any financial professionals, check in with them to determine how much you can afford to invest and see if they have any recommendations for you. If not, look at your budget and see how much you can afford to invest.
- Research mortgage funds: Once you have a better idea of what you can invest, start researching mortgage funds. You’ll want to evaluate each fund’s historical return rates, default rates and fee structure. For example, BNY Investments and Goldman Sachs offer two popular options.
- Create a short list: After you’ve created a list of possibilities, do a deep dive into your top contenders to ensure that their investment strategies match your risk tolerance and financial goals. You should also check that their portfolios are well diversified and comply with the law.
- Make your investment: If you feel secure in the information you’ve gathered, go ahead and make your investment.
Not sure about mortgage funds? Consider investing through seller financing arrangements instead.
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