One of the most common questions that we receive from investors in TaliMar Income Fund I, our recently launched mortgage fund that focuses on funding hard money loans, is, “should I take my monthly distributions or should I reinvest the distributions back into the mortgage fund?”
For those that currently invest in individual trust deeds, receiving a monthly payment is common. The borrower makes their payment, the payment is processed by the loan servicer, and the distribution is then released to the trust deed investor. The problem with this model is that when those funds are released to the trust deed investor, they sit in an account waiting to be reinvested and therefore do not earn income. We call this “sleeping money.”
The mortgage fund offers an alternative option. Instead of disbursing the monthly income to the investor, investors have the option to reinvest the funds. The primary advantage to this option is that the reinvested funds earn interest. Let’s explore further.
Because our mortgage fund makes monthly distributions on the income it generates, investors have the option to either receive a distribution in the form of a check or automatic deposit (ACH) or have those funds reinvested back into the mortgage fund. If the mortgage fund investor opts to take a monthly distribution, the funds are deposited into the investors account. If the investor opts to reinvest the funds, the income is applied to the principal balance of their investment and future earnings are calculated based upon the higher principal balance.
Most investors opt to have the monthly distribution reinvested into the fund. The primary reason they select this option is because the reinvested distributions earn interest. Because the monthly distributions are typically not large enough to reinvest elsewhere, it makes financial sense to keep those distributions in the mortgage fund. The investor can always take a partial distribution in the future if they need the funds.
Investors that opt to take the monthly distribution often need the income to pay monthly expenses or prefer to limit their investment in the fund to their original investment. The downside to this option is that the distributions often do not earn income when they are deposited into their account.
Let’s assume two investors each make a $250,000 investment into the mortgage fund. The investment earns a net 7.75% annualized yield and therefore earns $1,614.58 per month. Investor 1 decides to take his monthly distribution and deposits those funds into his bank account. Investor 2, on the other hand, decides that he can’t do much with $1,614.58 each month and decides to reinvest those funds. Investor 2 also knows that he can always take a partial distribution in the future if he needs the funds. The following month, Investor 2 earns income not on the original $250,000 investment, but on the $251,614.58. Investor 1, however, earns income on the original $250,000 and the distribution of $1,614.58 sits in his account not earning income.
Deciding to take a monthly distribution or reinvest the funds back into the mortgage fund is one of the most common questions that we receive. Investors that have invested in trust deeds are used to taking a monthly distribution and then wait to accrue sufficient funds to roll over the proceeds into another trust deed investment. However, the mortgage fund offers one key advantage, which is the ability to reinvest the monthly distribution, increase the principal balance of their investment, and therefore earn greater income in the long term.
TaliMar Financial has been providing trust deed investment and mortgage fund investment opportunities since 2008. Since that time, TaliMar Financial has funded over $260 million in loans and currently services a loan portfolio of $50 million. By offering to investment platforms, investors have the option invest in individual trust deeds or invest in a diversified pool of performing loans. Contact TaliMar Financial today at (858) 242-4900 to learn how you can start investing.