The term “Mortgage Fund” is often a generic term used for both a mortgage and a trust deed fund. A trust deed is like a mortgage but has the advantage of allowing lenders to foreclose on the property without going through a judicial process. California is a Trust Deed state, and therefore in California, when you hear the term “Mortgage Fund,” it is a Trust Deed fund.
I’ve had the privilege to manage two mortgage funds in California over the last 15 years. I have successfully navigated through two of the worst business cycles in our history, the 2008 recession, and currently effectively steering through another challenging time with the Covid-19 pandemic.
I understand how a mortgage fund operates, how to profitably manage a fund, and know the type of investors best suited for a mortgage fund.
What is a Mortgage Fund?
The definition of a mortgage fund is a trust entity operated by a fund manager who invests in real estate mortgages. The fund raises money by selling units in the entity, and that money is lent out as loans to a range of borrowers who refinance, buy, and develop properties.
Most mature mortgage funds have hundreds of loans in their portfolio. These loans are diversified by size and property type. The investors collectively share in all the loans in the pool.
A mortgage fund is typically constructed as a limited liability company or limited partnership that sells membership interests in the company.
Most mortgage funds have some form of SEC oversight with some exemptions. For example, Fidelis Private Fund, LP, is a limited partnership with SEC regulatory oversight under the SEC Reg D 506C, which permits the fund to advertise and raise capital nationwide from accredited investors only.
A mortgage fund must comply with the state and federal government agencies described in their disclosure documents, which requires full transparency for the investor. Most mortgage funds have fewer than a few hundred investors making personal access to senior management more accessible, with more transparency than an investment in a large publicly-traded company.
Real estate is an excellent investment. There is a minimal correlation with the stock and bond market. It’s a tangible asset with exceptional investment opportunities. However, the average person may not have the expertise or resources to own and manage investment real estate.
Therefore, a mortgage fund allows investors an opportunity to enjoy many of the benefits of real estate ownership without the associated costs.
Fidelis Private Fund is a mortgage fund that invests in a pool of diversified, secured real estate bridge loans generating a fixed income with minimal risk and acceptable liquidity.
What are the Benefits of a Mortgage Fund like Fidelis Private Fund?
Security– The majority of all Fidelis loans are first trust deeds. The average LTV on the portfolio is approximately 60%.
Experienced Fund Manager – The manager has successfully navigated a mortgage fund through the worst recessions in our history.
Fixed Income Stream – Our loans provide a safe, predictable, fixed income to the investor with distributions made quarterly.
Excellent Yield – The fund is currently yielding a competitive return of approximately 8%.
Minimal investment is required – Accredited investors can get started with as little as a $50,000 investment.
Diversification – The investment risk and return on investment are spread over multiple loans and product types.
Compounding Interest is Available – Investors may automatically reinvest interest distributions to take advantage of compound interest. Note: this benefit is not available in other fractional interest investment vehicles.
IRA Investment Opportunity – Invest through your IRA or Pension Plan to take advantage of the tax benefits.
Remain Fully Invested – Through efficient cash management, funds can be invested immediately and remain working as loans are funded and pay off. Note: this is unlike fractional interest trust deeds where timing and change of investments can require constant investor involvement resulting in lower overall returns.
Hedge Against Inflation – Limited interest rate risk since all loans are short term 3 years or less.
Liquidity – Investors may, with proper notice, withdraw their investment after one year with no penalty.
What Type of Investors are Best Suited for a Mortgage Fund?
A unique characteristic of a mortgage fund vs. a straight equity fund where real estate is owned and managed by the fund is in a mortgage fund, you are essentially partnering with the owner of the real estate, who has a vested interest in managing the secured asset for you, increasing its value, and generating an income for the investor.
A disadvantage of a mortgage fund is the investor doesn’t participate in the appreciation and tax benefits associated with owning real estate. However, on the flip side, a mortgage fund investor doesn’t incur the costs and hassle that comes with owning and managing real estate successfully.
Investors best suited for a mortgage fund:
- Investors who want to invest in a tangible asset like real estate but don’t have the resources to do it directly as an equity investment.
- Investors who want a steady fixed income on their investment.
- Investors who are acceptable with the receipt of ordinary income where their investment is not an IRA tax-sheltered investment.
- Investors who understand and accept there is often no immediate liquidity and require advance notice when liquidating their investment.
- Investors who want their investment diversified in both the number and type of properties secured.
- Investors who want the option to let their investment compound rather than receiving periodic interest payments as their only option.
Ultimately, investors must determine what alternative investments are the best choice for their portfolio, in terms of their goals and appetite for risk. But for those who seek to realize a predictable monthly income, while protecting their principal with an asset that can be resold if need be, mortgage funds offer excellent potential.
If you are not already an accredited investor in a mortgage fund like Fidelis Private Fund, please call me at 702-379-3468 or visit our website at Fidelispf.com, and I can share with you how you can start putting your investment to work in a mortgage fund.
What has been your experience with a mortgage fund as an investor?