Are Private Mortgage REITs a Good Investment?

Are Private Mortgage REITs a Good Investment?

Private Mortgage Real Estate Investment Trusts (REITs) have gained popularity in recent years as an alternative investment avenue. They offer investors the opportunity to earn consistent monthly income, the security of real estate, and several other benefits that make them an attractive option. However, like any investment, they come with their own set of risks. In this article, we will explore the advantages and disadvantages of investing in Private Mortgage REITs to help you make an informed decision about whether they are a good addition to your investment portfolio. 

Consistent Monthly Income 

One of the most appealing aspects of Private Mortgage REITs is their ability to provide investors with a steady stream of monthly income. These trusts invest in real estate debt, primarily in the form of mortgage loans, and generate income through interest payments from borrowers. Unlike traditional real estate investments that may produce income irregularly, Private Mortgage REITs offer a reliable and predictable cash flow, making them an attractive option for income-focused investors. 

Security of Real Estate 

Investing in Private Mortgage REITs allows investors to enjoy the security of real estate without the hassle of property management. When you invest in these trusts, your money is typically backed by physical real estate assets, such as residential or commercial properties. This asset-backed security provides a cushion against market volatility and economic downturns, making Private Mortgage REITs a more stable investment compared to some other asset classes. 


Investing directly in real estate often requires a significant upfront capital investment and can be less liquid, as selling a property can take time and may incur transaction costs. Private Mortgage REITs offer a more liquid option for investors. They are typically traded on stock exchanges, allowing investors to buy and sell shares easily. This liquidity provides investors with the flexibility to adjust their investment positions quickly based on changing market conditions or personal financial needs. 


Qualified Business Income Tax Deduction 

Another advantage of investing in Private Mortgage REITs is the potential for tax benefits. Thanks to the Tax Cuts and Jobs Act of 2017, investors in pass-through entities like REITs can benefit from a 20% qualified business income (QBI) tax deduction. This deduction can significantly reduce the tax burden on income generated from Private Mortgage REITs, making them a tax-efficient investment option for many individuals. 


Benefiting from Rising Interest Rates 

Private Mortgage REITs often thrive in environments with rising interest rates. As interest rates increase, the yields on the mortgage loans held by these trusts also rise, resulting in higher income for investors. This income boost can lead to improved total returns for investors, especially when compared to other fixed-income investments that may suffer in a rising rate environment. 


Risk Factors to Consider 

While Private Mortgage REITs offer several advantages, they are not without risks. Investors should carefully assess these risks before deciding to invest. Here are some key considerations: 


  1. **Fund Manager’s Experience:** The success of Private Mortgage REITs depends heavily on the expertise and experience of the fund manager. It is essential to research the track record and qualifications of the management team to ensure they have a history of making prudent investment decisions.


  1. **Property Type and Markets:** Different property types and markets have varying levels of risk and potential for returns. Assess the fund’s investment strategy and determine whether it aligns with your risk tolerance and investment goals. Some markets may be more volatile or susceptible to economic downturns than others.


  1. **Loan Structures:** The terms and structures of the loans in the REIT’s portfolio can significantly impact its risk profile. Investors should understand the loan-to-value ratios, interest rates, and borrower creditworthiness to assess the risk associated with the underlying assets.


  1. **Interest Rate Risk:** While rising interest rates can benefit Private Mortgage REITs, they are also exposed to interest rate risk. A sudden and significant increase in interest rates can negatively impact the value of the REIT’s assets and its income.


  1. **Market Conditions:** Economic and real estate market conditions can affect the performance of Private Mortgage REITs. A recession or housing market downturn can lead to a higher rate of loan defaults, impacting the REIT’s income and asset values.


Private Mortgage REITs offer investors a unique opportunity to earn consistent monthly income, benefit from the security of real estate, and access a more liquid investment option than direct real estate ownership. Additionally, the 20% qualified business income tax deduction can make them a tax-efficient investment choice. 

 However, it is crucial for investors to be aware of the associated risks, including the experience of the fund manager, the types of properties and markets in which the REIT invests, and the loan structures within its portfolio. Moreover, investors should monitor interest rate trends and be prepared for potential market fluctuations. 

 Ultimately, the decision to invest in Private Mortgage REITs should align with your financial goals, risk tolerance, and overall investment strategy. Diversification and due diligence are key when considering any investment, including Private Mortgage REITs, as they can play a valuable role in a well-rounded portfolio but should not be the sole focus of your investment strategy. Always consult with a financial advisor or conduct thorough research before making any investment decisions. 


About the Author 

Brock VandenBerg is the President of TaliMar Financial and Fund Manager of TaliMar Income Fund I. Mr. VandenBerg started investing in individual trust deeds in 2008, providing capital to real estate investors taking advantage on the housing crisis. He soon brought in outside investors to share in this lucrative opportunity to earn above market returns. After funding over $375 million in short-term loans and attracting over 500 investors, Mr. VandenBerg launched TaliMar Income Fund I in 2021 to offer investors a much more efficient way to invest in individual trust deeds. Currently, TaliMar Income Fund I invests on behalf of over 220 individual investors with over $60 million in assets under management.  


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