Understanding Mortgage note Investments
If you are a private investor looking to invest in real estate, but don’t possess the know-how or time required to acquire investment properties, mortgage note investments are an excellent alternative.
A mortgage note investment is created when an investor purchases a share of a mortgage note fund, which in turn owns a promissory note, and mortgage on real property. At which time, the fund becomes “the bank” and holds a legally negotiable instrument that is secured by real property.
The mortgage lending process is characterized by the arranging of a loan to a borrower who executed a promissory note and mortgage secured (recorded against) the real property. The promissory note is the borrower’s promise to repay the loan, and the mortgage is a security instrument (lien) recorded against the borrower’s real estate. Mortgage notes are saleable instruments that are regularly sold in the secondary mortgage market.
M&M Private Lending Group is an active participant in a smaller sub-market referred to as “private mortgage lending.” This market consists of private investors who purchase mortgage notes seeking higher returns and earning the interest due under the terms of the note. The private mortgage lending market evolved from the demand from borrowers who could not obtain loans through conventional sources, because of poor credit, unverifiable income, or time prohibitive situations, yet had sufficient equity in their properties.
The benefit to the lender and private investor is that these have higher interest rates, typically 10% to 13%. Private mortgage loan opportunities are great for investors where double-digit returns can be realized from these very attractive and secured investments. The risk associated with these loans is very acceptable since the amount of protective equity in the property provides protection to the investor against payment defaults, market fluctuations, and property devaluation. Protective equity is what provides security to the mortgage. M&M Private Lending Group typically requires that every property it lends against has a minimum of 40% to 50% protective equity.
To illustrate, if a property has a Fair Market Value of $1,000,000, the fund restricts the loan to a maximum of $600,000; conversely, we would not permit a loan any higher than 65% of the Fair Market Value; also referred to as the Loan-To-Value Ratio. Typically, the lower the LTV, the better and more attractive the mortgage note investment is, thus warranting consideration for the fund. Since the amount of protective equity directly relates to the security of the mortgage note, it is fair to say that the primary risk to the investor relies on the amount of protective equity remaining in the property.
By Michael InternosciaManaging Partner M&M Private Lending Group, LLC