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Private Mortgage Investing
Two Main Lending Strategies
There are two methods of getting started in private mortgages; Mortgage Pools and Direct Lending.
Mortgage pools are like the mutual funds of private mortgages. Each investor's money is pooled with the other investors participating in the pool and the money is used for private lending.
Over the years there have been some notable benefits to investing in a mortgage pool. Because a mortgage pool is pooling the money of all investors, the pool manager is able to reduce risk by diversifying over many different properties.
Of course, the trade-off to mortgage pool investing is reduced returns. The mortgage pool manager draws their pay directly from pool profits. This substantially lowers profits and cuts deep into investor's pockets. However, many investors have leaned toward the mortgage pool option over the direct lending option because it was easier and incurred less risk.
The Equity Build Finance strategy of investment overcomes the former downside of direct private mortgage lending, giving direct private mortgages the advantages of mortgage pools without the historical challenges typically associated with direct private mortgages. Direct lending is typically reserved for seasoned real estate professionals due to the level of expertise that is needed to identify undervalued properties and go through the appropriate steps to protect the investment and assure a top return on investment. In return, however, they are able to gain direct access to the collateral provided in the direct lending model.
The direct lender typically has an appraisal done on the property, analyzes the value of the property and the upgrades it will need, works the numbers to determine a break-even point, and then calculates what kind of offer on the property will be feasible to earn a good return on investment. Once that's done they find a qualified buyer to purchase the property and draw up paperwork that protects them against the possibility of the buyer defaulting on the mortgage.
It's actually, in our opinion, very satisfying work. However, it does take a great deal of expertise. We have made direct private mortgage lending a real possibility, even for the average investor. You don't need any expertise in the real estate market to take advantage of the combination of, good returns and stability, that private mortgages offer. We do all the ground work for you. All you need to do to take part in direct private lending is invest the money.
As a direct investor, you'll be able to take advantage of higher returns than you would get if you invested in a mortgage pool without any of the expert knowledge required.