Adding real estate exposure to your portfolio can help you diversify, reduce volatility, and increase risk-adjusted returns. Mortgage pool funds are a sort of real estate investment that is relatively gaining popularity among potential investors.
A mortgage pool fund is formed by assembling a portfolio of real estate loans that are collectively owned by the fund’s shareholders. The pool’s capital is used to fund loans to real estate professionals who need the money to buy, repair, and resell investable properties. The loans are secured by real estate, are often short-term in nature, and have higher interest rates than traditional mortgages.
Investors are drawn to mortgage pool funds because of their competitive returns, consistent income, and low correlation with other assets, which helps portfolio diversification and risk management. Many investors have misconceptions regarding mortgage pool funds because they are unfamiliar with them. Three frequent misconceptions are addressed below.
- Mortgage pool funds are highly risky
Any investment carries risk, and investors should carefully consider their risk tolerance and liquidity requirements before investing. Mortgage pool funds are more conservative than banks, with loans often limited to 70% or less of the property’s worth. Fund managers provide a safety net by keeping a margin between the loan amount and the property’s value.
This cushion protects investors by allowing them to recover the full amount of principle and interest if the loan defaults and the property is foreclosed and sold. Another feature of mortgage pool funds that decreases risk is the short duration of their loans, which typically range from one to three years. Changes in interest rates have a less impact on short-term loans.
- Mortgage pool funds can lock up resources for years
Start-up mortgage pool funds may contain lock-up restrictions that limit capital withdrawals during the fund’s first few years of operation, but most mortgage pool funds aim to satisfy their investors’ liquidity demands by making invested cash redeemable on fair notice. Many mortgage pool funds provide redemption provisions, making them more liquid than direct real estate investments or real estate crowd funding projects.
- Rising interest rates make mortgage pool funds less tempting
Although higher interest rates affect fixed income assets, mortgage pool funds can redeploy cash faster than bonds. Intermediate bonds have maturities ranging from 5 to 12 years and long-term bonds from 12 to 30 years.
In comparison, mortgage pool fund loans typically mature within 12 to 36 months. There are short-term government bonds with maturities comparable to mortgage pool fund loans, but their yields are currently less than 1%. This contrasts to the 7-8% yearly returns already available from several mortgage pool products.
So, these were the common misconceptions people usually have regarding mortgage pool investments. If you too believe in any of them, let us debunk the myth for you. Versa Platinum is a leading mortgage investment corporation assisting potential investors in making a profitable mortgage investment in Abbotsford. From bringing quarterly returns to generating tax benefits, our mortgage pool offers immense benefits. For more details, contact us today.
