Why More Registered Investment Advisors Are Turning to Private Mortgage Funds

As market volatility and low bond yields continue to challenge traditional fixed-income strategies, Registered Investment Advisors (RIAs) are increasingly exploring alternative asset classes to generate consistent returns for their clients. One vehicle gaining significant traction is the private mortgage fund—a pool of real estate-secured loans offering attractive risk-adjusted returns, often with monthly income distributions.

These funds, which provide short-term financing to real estate investors and developers, have become a compelling option for RIAs seeking to diversify client portfolios, enhance income, and preserve capital. But while the headline yield is certainly attractive, it’s essential for advisors to conduct a holistic evaluation of these funds before making allocation decisions.

The Appeal of Private Mortgage Funds

Private mortgage funds are typically secured by first-position liens on residential and commercial real estate. With loan-to-value (LTV) ratios often capped at conservative levels (e.g., 65% or less), and short durations (12 months or less), they can offer an attractive balance between risk and reward. Moreover, many funds distribute income monthly and structure themselves to be REIT-compliant, allowing non-retirement investors to benefit from the Qualified Business Income (QBI) deduction, which can further enhance after-tax returns.

5 Key Considerations for RIAs Beyond Just Yield

While yield is an important metric, RIAs must assess several critical factors to ensure the underlying investment aligns with their fiduciary responsibilities and client objectives. Here are the top five considerations:

1. Sponsor Experience and Track Record

The performance of a private mortgage fund is heavily influenced by the competency of the fund sponsor. Advisors should evaluate:

• Years of operational history
• Historical default and loss rates
• The team’s background in real estate, lending, and fund management
• Transparency and communication standards with investors

An experienced sponsor not only improves the quality of underwriting and loan servicing but also helps mitigate risk during market downturns.

2. Property Location

Geographic focus can significantly impact the risk profile of the fund. RIAs should ask:

• Are the properties located in urban or suburban markets with stable demand?
• Does the sponsor avoid high-volatility rural or tertiary markets?
• What economic or demographic trends support real estate values in the fund’s target regions?

A fund focused on core, supply-constrained markets is more likely to preserve asset values even in slower market cycles.

3. Property Type

Understanding the types of properties securing the fund’s loans is essential:

• Does the fund lend on residential, multifamily, or commercial real estate?
• Are the properties stabilized or value-add?
• How diversified is the portfolio by property type?

Funds that limit exposure to specialty or volatile asset classes and maintain strong collateral diversification tend to offer more predictable performance.

4. Fund Structure and Tax Efficiency

Many high-net-worth investors appreciate the REIT election offered by some private mortgage funds. Benefits include:

• Pass-through taxation of interest income
• 20% QBI deduction for eligible non-retirement accounts
• Often no state-level withholding for out-of-state investors (subject to fund structure)

RIAs should confirm whether the fund structure aligns with their clients’ tax planning strategies, particularly when investing through IRAs, trusts, or family offices.

5. Borrower Profile

The quality and experience of the fund’s borrowers is a key risk factor:

• Does the fund primarily lend to experienced real estate investors or first-time flippers?
• Are borrowers required to contribute meaningful equity into each deal?
• What is the sponsor’s process for vetting and approving loan requests?

Funds that lend to repeat, professional investors with proven track records are generally better positioned to maintain performance and limit defaults.

Conclusion

Private mortgage funds can be a powerful tool in an RIA’s portfolio construction strategy—offering steady income, downside protection, and diversification away from public markets. However, a responsible approach requires looking beyond the surface-level return and assessing the underlying fundamentals that drive long-term performance.

By carefully considering the sponsor’s expertise, collateral profile, geographic footprint, fund structure, and borrower base, RIAs can identify funds that align with their clients’ goals while maintaining the high standard of diligence their fiduciary duty demands.

About TaliMar Financial and TaliMar Income Fund

TaliMar Income Fund I offers investors the ability to participate in the rapidly growing demand for private real estate debt. The fund is comprised of a diversified portfolio of short-term loans secured primarily on residential single family and multi-family properties throughout California. The fund manager, TaliMar Financial, was established in 2008 and has successfully funded over $500 million in loans.  Investors in the mortgage fund include high net worth investors, family offices, and private equity funds who are seeking consistent monthly income, the security of real estate, and the tax benefits of a mortgage fund structured as a real estate investor trust. 

Disclosure: This advertisement is for informational purposes only and does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can only be made by the Private Placement Memorandum (“PPM”) and related subscription documents. Any investment in TaliMar Income Fund I involves significant risk. You should not enter into any transactions unless you fully understand all such risks and have independently determined that such transactions are appropriate for you. Business Purpose Loans arranged through TaliMar Income Fund I, LLC (DFPI CFL License No. 60DBO-137778).