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The mortgage fund has become a popular investment vehicle for investors seeking consistent monthly income. Its growth has been fueled by the expansion of the real estate private lending industry, which itself has been driven by the real estate investment market. Because conventional lenders remain hesitant to reenter this space after the mortgage crisis, the market for private lenders serving the real estate industry has exploded.
In this article we will explain mortgage funds and what you should look for in this type of investment. We will also discuss the risks of a mortgage fund and what you can do to limit that risk. Lastly, we will explore how you can identify and invest in a mortgage fund that aligns with your investment risk profile.
A mortgage fund is an investment vehicle that consists of a portfolio of mortgages and offers consistent monthly or quarterly income to its investors. The mortgage fund pools investor capital and uses that capital to fund and service mortgages. Investors are paid monthly or quarterly distributions from the interest and other fees earned by the mortgage fund. Mortgage funds range in size from a several million to over a billion in serviced loans.
In a mortgage fund, the investors are secured on a portfolio of mortgages. The mortgage fund is secured on the real estate its borrowers have pledged as collateral for the loan. If done correctly, the mortgage fund will raise capital from investors and then fund mortgages with that capital. Borrowers will make monthly payments to the mortgage fund which will then in turn disburse the proceeds to its investors. When the investor is ready to withdraw their funds, the fund manager will coordinate the withdrawal as liquidity enters the fund in the form of a loan payoff, borrower interest payments, new investor capital contributions, or by use of a bank credit line if the fund uses leverage for its daily operations.
A mortgage fund offers several advantages to investors seeking consistent monthly or quarterly income. Depending upon the risk of the mortgage fund, the fund may return between 6% to 10%+ to an investor. The fund is also diversified over a portfolio of mortgages, which reduces its exposure to any one loan, and can offer some tax advantages to qualified investors.
One of the biggest advantages of a mortgage fund is the ability to diversify your investment into a portfolio of mortgages. This is a significant advantage over the similar trust deed investment model which is secures investor funds on one loan. Should the borrower stop making payments on that one loan, the income generated from the investment still stop. This differs from a portfolio of mortgages where if one mortgage defaults, there is still income generated from the other mortgages in the portfolio.
Another big advantage of a mortgage fund structured as a mortgage real estate investment trust, also known as a REIT, are the tax benefits. As a result of the 2017 Tax Cut and Jobs Act, a mortgage REIT qualifies for the Qualified Business Income (QBI) tax deduction. Per the tax code, only 80% of income generated through the passthrough entity will be subject to federal tax, the rest is tax free. For high net worth or high-income earners, the effective federal tax rate drops from 37% to 29.5%.
Other advantages of a mortgage fund is the elimination of the Unqualified Business Income Tax also know as UBIT. Gains in a 401k, Self-Directed IRA, or any other form of a retirement account, are still subject to income tax if the investment used leverage. As a result, the tax benefit of using retirement funds to for an investment is significantly impacted. In a mortgage fund structured as a REIT, UBIT is eliminated.
Not all mortgage funds are created equal. The biggest differences between funds are the types of loans they target. This may include property type, loan position, loan to value ratio, loan size, use of leverage, and region, among other variables. All of these differences add some type of risk and therefore increase or decrease investor return.
An example would be a mortgage fund that targets 1st position loans secured on single family or multi-family properties up to 70% loan to value, which is a basic, low risk mortgage fund, versus a mortgage fund that targets 2nd position loans secured on ground up construction projects. The later may result in a much higher return, but is a much higher risk proposition.
Investors should read each mortgage fund prospectus closely and understand the underlying risk. Make sure the risk associated with the mortgage fund aligns with your risk profile. We highly recommend that you speak with your CPA or attorney before investing in a mortgage fund.
Finding the right mortgage fund with an experienced manager and with a risk profile that meets your comfort level is the first step in investing in a mortgage fund. Once you have identified a mortgage fund that meets your requirements, request the underlying fund documents, such as the Private Placement Memorandum, Subscription Agreement, schedule of active loans, and the audited financial statements for the prior year. Review each carefully to ensure that you are comfortable with funds investment criteria, the current schedule of loans, and their financial statements. It would also be best practice to meet with the fund manager.
A great resource to consider when you are searching for a mortgage fund is Verivest. Verivest is a Fund Administrator that provides back-office general accounting, investor accreditation, fund distribution, and other services to mortgage fund managers. They also complete full background checks on mortgage funds, including a review of their financial statements, assets under management, and verification checks on the fund managers. They post those results on their website, awarding a “gold seal” to funds that meeting their highest criteria.
Investing in a mortgage fund is a great option for investors seeking steady monthly or quarterly income secured by real estate. Many mortgage funds also offer some tax advantages when they are structured as a real estate investment trust (REIT). There are inherent risks in mortgage funds, mainly the risk that the underlying mortgages in the fund stop performing. It is important to review each mortgage fund carefully before investing. Using online tools can assist with identifying the right mortgage fund for you.
TaliMar Income Fund I is a mortgage fund structured as a Real Estate Investment Trust and focuses on funding private money loans secured on single family, multi-family, and other property types in the California and surrounding markets.
TaliMar Income Fund I is managed by TaliMar Financial, Inc. a private lender servicing the real estate industry and headquartered in San Diego, California. TaliMar Financial has successfully funded 600+ loans totaling over $220 million and currently manages a loan portfolio consisting of 90+ loans and with an outstanding balance of over $45 million.
TaliMar Financial launched TaliMar Income Fund I in 2021 to offer its existing trust deed investor base an alternative investment vehicle that provides significant tax benefits and the ability to diversify their investment over a portfolio of mortgages.
Contact TaliMar Financial today at (858) 242-4900 or visit talimarfinancial.com to learn more about the mortgage fund.
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